Investors are only human and humans make mistakes. This means that investors can make mistakes and, interestingly, there are some mistakes investors make on a regular basis. Here are four of them and what you can do about them.
Failing to set SMART goals
The SMART (Specific, Measurable, Achievable, Realistic, Targets) concept may be one of the biggest cliches around, but it’s also both true and massively important. You are investing for a reason, in fact, you may have more than one reason and if so then you will need to rank those reasons in order of priority. You will need to know how much money it will take to achieve your goals and you will need a way to measure your progress towards those goals.
Investing without SMART goals is like wandering aimlessly around a town without a clear destination in mind. It might be fun, it might be educational and it might even be profitable if you get lucky, but you’re going to have to rely on luck and relying on luck is a dangerous strategy (if it can even be called a strategy).
Solution: Diarize financial health-checks and either talk to a professional or have a set of prompts you must answer so you always remember what you need to check and why.
Failing to grasp what diversification actually means
At the end of the day, diversification basically means doing what it takes to ensure that you have enough income for your needs (and preferably your wants) regardless of the prevailing economic conditions at any point in time.
Smart investors recognize that they will probably be investing through “boom” and “busts” and many shades in between, so they do whatever they can to make sure that the overall performance of their portfolio will meet a minimum standard regardless of what the general economy is doing. At the same time, they will only diversify as far as they can reasonably manage. They will not spread themselves so thin that they lose track of their individual investments or that they spend more time managing their investments than the returns justify.
Solution: Keep the real meaning of diversification front and centre at all times.
Focussing on “froth” rather than on fundamentals
There are all kinds of ways this mistake can manifest itself, of which perhaps the most obvious is the general nervousness which can accompany market volatility to the point where any bad news can create a self-fulfilling prophecy for a company. Bad news spooks investors, investors get nervous and sell, this makes more bad news and so on. Astute investors recognize that emotions are a part of life and that not only can investors be as emotional as everyone else, but that they can be as emotional as everyone else. They, therefore, make a point of investing mindfully, being clear about what they are doing, why and what they expect to see from each of their investments. Then they have a solid basis for making decisions.
Solution: Just as you set SMART goals for your overall investment performance, so you also need to set SMART goals for what you expect to see from each particular investment.
Failing to factor in transaction costs and taxes
The more you trade, the more you will pay in trading costs and, potentially, the more exposed you will be to taxes. This, of course, depends on many factors, not least where you live, but, in the UK, for example, larger companies will typically be VAT-registered, which means that they will either have to factor VAT into the price they quote or they will have to add it as an extra when you come to pay. This means that one way or another, you will be paying tax whenever you make a trade.
Solution: Do your sums properly.