Common Investment Mistakes to Avoid in Long Term
‘To Err is Human’
This is a famous saying which reinforces the known fact that humans are not perfect applies to the world of investments as well. It is quite common for people to make mistakes while making use of their money for investment purposes aiming to generate returns through financial instruments.
When it comes to short term investments, such as day trading or positional trading, mistakes can be corrected on the next day, without any considerable loss of time. However, when it comes to long term investment, realizing mistakes itself can take a long time by when it might be too late. Hence, the saying ‘Prevention is better than cure’.
Let’s learn some ways in which you can prevent mistakes from happening and what are the most common mistakes you are likely to do in case of long term investments.
Avoid 10 Most Common Investment Mistakes in Long Term
1. Being too Comfortable with One Company is the Most Common Investment Mistake
This is a mistake which many long term investors commit. They become too comfortable with the company they have studied about and are knowledgeable of, ignoring other companies which also present a good opportunity of earning. If you too feel attached with a company, then it will not be a good sign for a long term investment as you are likely to ignore the negative news which might be alarming signals and an indication to exit from the position.
2. Not Diversifying
This is another common investment mistake in long term investment. It is necessary to diversify your assets when investing for long term. Diversification should be done not only across different asset classes, but also across different sectors if you are planning to invest your money in stock markets. This helps in mitigating any risk which might impact a particular sector or the markets in general. It is believed that stock markets and commodity markets have inverse relations. This means that when stock markets fall, commodity prices rise and vice versa. Hence, diversification across equity and commodity markets is also important.
3. Being a Risk Seeker in falling Investments
This is a concept of behavioral analysis which says that when you are making profits, you tend to be risk averse and when you are in loss, you tend to be risk seekers. This means that when the investment you made is in positive, you are tempted to close your investment early, without waiting for it to achieve its full target, and when your investment is in loss, you delay cutting your losses and closing your trades hoping that the markets will recover and you will be able to earn back the lost amount. This is a huge mistake in long term investments. If your investments are in negative, then it is always wise to follow a strict stop loss and exit a loss making position before it leads to further losses. There is no point in waiting for losses to magnify hoping for a recovery in the markets.
4. Over Diversification
If you over diversify your investments, then that too is a common investment mistake which you should avoid. Too many investments can confuse you about their returns and you would need to keep a constant tab on each of them, which can be very time-taking. Also, in case of over diversification, the overall gains might not be as fruitful as compared to gains from few selected quality investments.
5. Frequent Withdrawals
The most important mantra of long term investment is that you have to keep your money invested for long. Frequently changing positions or withdrawing your money is not a healthy practice and can lead to losses and poor returns. The benefit of compounding cannot be achieved if you withdraw too frequently and also, you would be subject to taxed and higher transactional costs in case of frequent withdrawals.
6. Panic in Face of Losses
When you have invested for a long term and your investments are showing negative, then the best approach is to wait it out till it gets clear whether the negative turn was temporary or for a longer duration. Taking actions on the smallest of losses can be harmful for your long term investment strategy.
7. Looking at Portfolio Everyday
Long term investments result in gains over a period of time and you should not check your portfolio on a daily basis. Markets across the world are quite volatile and price fluctuations are quite common in stock markets. Hence, the portfolio value will keep going up and down as per these fluctuations. Looking at the portfolio daily will only serve to make you more anxious and stressed, under the influence of which you can commit mistakes with respect to your investments.
8. Timing the Markets
Timing the market is the practice of predicting the price movements and buying or selling accordingly to make profits. While stock markets are all about timing the markets, but you should not time the markets arbitrarily on the basis of beliefs and assumptions. Do not initiate buy position if you feel that the markets have fallen ‘long enough’. This can be dangerous. Always adopt a more scientific approach towards stock market research.
9. Not Doing Enough Research
Stock market research is the essence of investments in the markets. It is useless to invest money in the markets if you have not done a proper research. Following herd mentality or taking suggestions from friends, family and non certified experts can lead to disastrous consequences. Hence, it is extremely important to either do your research yourself or to take help from a certified investment advisor who has the right approach towards investments and conducts research in a scientific manner.
10. Losing Focus of the Investment Objective
Lastly, forgetting your investments after you make them is also a common investment mistake you should avoid. While it I not recommended to look at your investments daily, you should definitely take stock of your investments once in three months or six months to track whether they are on track or not. This helps you in staying focused to your investment goals.
Conclusion:
Maintaining a diary, journal or record of all your long term investments and reviewing them periodically can help you a big deals in staying on top of your financial goals. Long term investments require a dedication and commitment. Therefore, it is important to stay committed to your goals an avoid common investment mistakes throughout your investment journey
Author
CapitalVia
Pioneer in Investment Advisor
