Successful investment basically involves analysing hard data through the prism of human judgement. This means that there are two prerequisites to successful investment, one is good data and the other is good judgement. Investors have to rely on companies for the former (supervised by auditors), the latter comes from them. Part of good judgement means avoiding mistakes wherever possible and here are three which routinely trap investors.
Lack of consistency
Some investors are like the people who hit the gym every January where they go all out to sweat off the pounds they put on during the festive excesses. By February, if not before, many of these former workout fanatics have slunk off home not to be seen until the following year. People who are genuinely committed to fitness, however, show up day after day, all year round and while their precise level of fitness may vary depending on various factors, the fact still remains that, overall, they’re the ones who are far more likely to achieve consistent, sustainable results. If your annual bonus is the only money you have free to invest in the stock market, that’s fine, but making an investment is a bit like planting a seed, you generally need to give it some degree of attention. How much attention it needs will depend on what kind of investment it is. Just as seeds can be transplanted, your investment funds can be moved from one asset to another, but this should only be done when there is a good reason for doing so. Investors who continually hop about from one asset to another can find themselves struggling to achieve good returns.
When markets are surging it can be easy to convince yourself that you’re a great investor when, in reality, you just got lucky. That may seem a harsh statement, but it is true. If the stock market is on a continual upward trend then you can do very well by just letting yourself be carried along with the tide, without actually applying any of the skill or judgement which characterises good investors. In fairness, it can be very hard to look objectively at your own performance, which is why it can be helpful to get an objective opinion from a third party, although only if that third party knows what they’re talking about and only if you actually listen to them. This is one argument in favour of investing with help from a professional such as a financial advisor or asset manager. They can act as brakes on rash decisions which could end up hurting your finances. You could also consider joining an investment club, real-world or online, where you can discuss ideas with other investors who may not be professionals but may have different areas of expertise from you and hence give you a different perspective on any situation.
Lack of confidence
The perfect moment to invest is whenever you have investment funds to spare. If that’s right now, then it’s right now. If it’s not, it’s as soon as you have managed to acquire some investment capital. That doesn’t mean you have to put your money into the first investment you see but it does mean that you have to realise that investment only happens when you actually take action. Some investors become bogged down in “analysis paralysis” with the result that their finger freezes on the “buy” button (or the “sell” button) and they never actually get around to doing anything. At best, these investors may opt for the safest of investments, which may have the lowest risk of capital loss, but may also struggle even to keep up with inflation let alone make any meaningful gains.