Updated: 6 days ago
Author: Marie Gerland
Date of Publication: 02/05/2023
People are willing to make investments in order to generate returns. More to the point, investment decisions can have a great impact on the financial wealth of individuals. However, investors can make mistakes when making investment decisions. Actually, this is normal! Everyone can make a mistake, but it can have dramatic financial consequences. So, it is important to avoid investment mistakes by any means.
Let’s take a look at 8 common mistakes made by investors and see how it is possible to avoid them. Thus, the aim is to stop making the same errors while investing.
Going too fast
It is important to take time before investing into a stock or a cryptocurrency. Indeed, people should study the investment opportunities and the risks that could appear. Therefore, an investor should have a clear understanding of the investment being made.
Moreover, the investor should be patient and calm. In fact, some investors react too fast to some losses and sometimes panic. As a result, this leads frequently to some bad decisions. So, the key is to take time to understand the investment and to be calm while facing some losses.
Lack of clear goals
An investor should have a plan before making an investment. In particular, in any field, it is better to have clear objectives in order to have better and more efficient results. It is also the case when taking investment decisions. Therefore, before the investment, an investor should be clear on a few investment elements:
the amount to invest,
the expected returns
the level of risk.
Investing money you do not have
Investments are risky. This is why everyone should be ready to lose the money invested. Also, that’s why the amount invested should be available money. For example, it is not a good idea to contract debt to make investments. So, a good tip for investors is to set a fixed percentage of revenues, for example, to invest each month. Thus, it becomes impossible to invest money you do not have.
Lack of diversification with investments
You should put your eggs in different baskets. Actually, diversification is crucial in investments for several reasons. First, it’s key to managing risks. For example, if you have a big loss on an individual investment, the other investments will compensate for the loss.
Second, diversification can lead to high returns. Indeed, if an investor invests in different sectors or different sizes of companies, it creates diversification. Consequently, this increases the chances to invest in promising stocks. So, it is the only way to have a good risk return balance.
Focus on the short-term
An investment should be made with a long-term view, around 5 years for example. It’s true that the market is changing fast and it cannot always be predicted. Therefore, if an investor chooses to focus on the short-term, it will be complex to follow the market.
Apart from that, short-term investment increases risk due to the volatility of the market. But it also leads to high transaction fees, because of the higher number of transactions. So, it takes time to follow all movements of the market in the short-term.
Following others’ decisions
It is tempting to follow the investment advice or decisions of an acquaintance or information from the media. However, it doesn’t always pay off. First, a good investment in a situation isn’t always a good investment in your situation. Therefore, the investment should be adapted to your risk aversion.
Second, sometimes some investments become popular but have no financial stability. Then, a drop in prices can occur. Thus, following the popularity of a stock can lead to bad investment decisions.
Not taking inflation into account
Investing can be a good means to avoid “losing” money due to inflation. If someone is saving money in a bank account, but the interest rate is lower than inflation, the value of the saving will decrease. Thus, an investor should look at the real value of an investment and not only at the absolute value of returns.
Paying high fees
Before investing, an investor has to understand its investment, and thus to be aware of the amount of fees to pay. Bear in mind that the higher the transaction fees, the lower the return is. Therefore, the transaction fees have an impact on the wealth of the investor. It is not just a small detail, and fees have their importance.
So, now you are aware of the 8 biggest mistakes to avoid when making an investment. And it is really important to avoid these mistakes to achieve financial success in the long term. Thus, it is crucial to be a disciplined investor, focused on the long-term and to be curious. In any case, it is always better to be informed and to seek advice from professionals.