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Avoiding Common Investing Pitfalls

 

Even the most experienced of investors, including professional advisors, occasionally overlook the fundamentals of investing, often resulting in negative consequences for their portfolios, and investing clients. For less experienced investors, the challenges to avoid these same factors can be even more difficult, and can lead to far greater disappointing results. However, by following a few simple guidelines, investors can improve their chances of sidestepping common investing pitfalls, leading to improved long term investing success. These include:

Set Goals: Investors are more likely to attain long term investing success by selecting a goal, develop a plan for getting there, and then regularly monitoring their progress, modifying as necessary their investment allocations commensurate with their changing risk tolerance. Long term investing is not flying by ‘auto-pilot’, rather, it is a ‘hands-on’ approach that requires you to regularly review where you are, and then to make necessary changes to reach your long term goals.

Don’t Chase Performance: When identifying possible changes in your investment holdings, either in buying or selling, be sure to evaluate whether this is helpful and consistent with your stated goal. Resist the temptation to hastily invest in a new ‘hot’ investment. In such cases, investing now may be too late, and the performance may have already peaked. Likewise, resist the ‘dumping’ of an underperforming investment. Even the best of companies go thru short term downturns, so if the underperforming issue is still fundamentally sound with good long term prospects, it may be worthwhile to give such investments time to recover.

Avoid Overconfidence: It’s important to understand the stock market includes general ‘market-risk’ – factors that simultaneously affect the prices of all marketable securities, such as changes in the economy, politics, world events, etc. Recognizing that as an investor you are limited in avoiding this risk, it is vital you rely on objective data when making decisions for your investments that are consistent with your stated goal and maintain proper allocation and diversification to reach that goal.

Take a Balanced Approach: The mix of different asset classes (stocks, bonds, cash, and alternative investments) must be consistent with your stated goal, your tolerance of risk and where you are in terms of your investing pathway – just beginning or nearing retirement. Younger investors can take a more aggressive approach with their investment allocation; older investors a more balanced, moderate and perhaps even conservative allocation.

Don’t Obsess: With widespread access to the Internet, and instant connectivity available through mobile devices, it’s easier than ever for investors to monitor their portfolio on a daily – or even hourly – basis. That doesn’t mean you should. Tracking and watching the daily price movements and performance of your investments can lead to impulsive decisions, with greater likelihood of overreacting to market-risk events. Stay focused, allowing sufficient time for understanding the fundamentals of your investments, and then make changes consistent with your long term goal and plan.

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-reference: Vanguard Investments