Seven deadly investment sins
Having traded and invested professionally for the last six years now, I have seen stock markets enjoy both short term booms and short term busts.
More significantly, I have seen and learned how my clients react to changing market conditions.
The most fascinating thing to me is how alike most investors are.
The one thing all investors have in common is that they all want as much return for as little risk as possible.
Furthermore, an extremely high percentage of these clients react almost identically in times of trouble or bad market conditions.
The plain and simple truth is that stock market moves are dominated by two emotions: fear and greed.
Both these emotions cause markets to over-react in both directions.
Sell-offs tend to be exaggerated and market rallies usually overshoot reality.
The only way to be a successful long term investor is to cut out the noise.
Always be mindful of these powerful human emotions and focus on your investment goals, rather than short term threats.
There will always be something to scare markets.
How you behave makes all the difference in your longer term returns.
As a longer term investor, there are definite behavioural no-no’s when it comes to your long term goals.
Let’s call them Robby P’s seven deadly investment sins.
• Never invest borrowed money
Borrowed money costs money. The interest you are charged for borrowing that cash means your investments need to perform extremely well for you to cover that “overhead”. Your returns will be eroded by the debt burden.
• Never ignore inflation
Many investors merely focus on the return they see in their portfolio. Your returns are eroded by high inflation. If the price of goods and services increase, it means your gains are worth less.
• Don’t fail to diversify
Spread your risk. Don’t have all your eggs in one basket. If you can spread your capital around different asset classes do so. You increase your market shock survival rate.
• Do not panic
Fear and greed rule the market. You are a long term investor and short term scares will not matter in years to come. Those who panic make less over time.
• Do not over-trade
For a long term investor, over trading can be disastrous. Buying and selling too often means your portfolio never has time to mature and grow. Trading incurs fees, so it can become expensive.
• Don’t try-time the market
Trying to pick tops and bottoms in the market is for fools. You are embarking on an investment journey. Your time horizon is long enough to absorb short term losses. It’s about the bigger picture.
• Don’t take on the wrong risk
Nobody knows you better than you know yourself. Understand your own risk tolerance and don’t invest in products or assets that you don’t understand or which have a higher risk of loss than you are prepared to handle.
The stock market is still one of the best ways to achieve yield.
Investors still invest in financial markets to beat the price of money.
Understanding your own goals and avoiding the pitfalls made by many investors will go a long way to maximising your portfolio’s potential.
I always encourage speaking to a professional.
You work hard for your money, so use whatever avenues are available to you to protect it and make it grow.
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