The best approach to the investment is directly connected with careful research and discipline. No one is impervious to mistakes. Even successful investors and experienced traders sometimes make them. As it is impossible to avoid mistakes completely, successful people learn from their own mistakes, aiming to minimize their number in the future. Here are some of the most widespread mistakes of investors and recommendations on how to avoid them and to receive good results.
1. Affection to the company or to the stock
Even experienced investors have favorites. Admiration of a management, products or philosophy of the company can be the cause of it. The problem of affection to a certain stock consists in that it becomes much more difficult to sell it. For example, the fact that you adore the new smartphone does not mean at all that stocks of his producer is a good investment of capital.
Investors can hold a position longer than it is needed, only because it is the stocks of their favorite company. Though such problem will hardly concern professional stock managing directors, experienced private investors under certain circumstances are subject to it. A number of research shows: it is always more difficult to sell stocks than to buy them. To avoid this mistake, think over the rules of portfolio management. If the stock lags behind the market or has an adverse effect on portfolio return, it should be replaced. All investments shall be estimated by identical criteria. The main thing in this approach is discipline.
2. Holding the unprofitable positions
The decision to sell is one of the most difficult in successful investment. In many respects, such situation appears because shareholders trust in a sudden turn of the lagging behind the paper. Instead of selling the cheapening stock, they continue to wait, hoping to close a position at least in the black. Two problems are connected with such approach. First, there is no basis to believe that the stock will grow. The cheapening paper shows to investors only the capability to fall, but not grow. In some cases the position is developed, in others just requires more long-term horizon. However, the ownership of the stock based only on hope is much more often leads to considerable losses. Secondly, wasting time for expectation, investors miss more interesting options. It is called “the missed opportunity” though it would be correct to call it “wasted”. Investors should estimate constantly missed opportunities because of excessive attachment to an unprofitable position. To avoid this mistake, it is regularly and objectively necessary to estimate the portfolio.
3. Lack of the plan
Well-known investment principle — plan the transaction, trade according to the plan. In other words, before investing at least one cent in some paper, the investor shall prepare the plan where he has to write why he buys the paper, what purpose of growth it is and how many he is ready to lose. It is at least important to hold to this plan after purchase. A keynote here that even experienced investors sometimes becomes emotionally involved in trading. Planning allocates the investor with necessary rules to which he shall follow from the beginning of the transaction till its closing.
4. Bad diversification
Some situations interfere with proper diversification. For example, the employees investing in stocks of the company put themselves at the increased risk. Besides, the most fast-growing stocks occupy too big share in the investor's portfolio over time if he forgets about its reducing in the process of growth. The purpose of the diversified portfolio is to avoid the possible severe losses connected with one investment. It is extremely important as even experienced traders from time to time forget to rebalance the portfolios. It is possible to avoid this mistake, having created the schedule and strictly adhering to it. The correct diversification will help to reduce the risk of a portfolio considerably.
5. Choice of a right moment
A huge mistake of skilled investors — a conclusion of assets from the lagging behind funds and hunting behind the best indicators. Even great managing directors of times yield to the market. The choice of a right moment for investment is not always possible, however, investors nevertheless are obliged to solve on what assets to make the investments. The asset allocation is considered the most important factor determining results. In an article of 1994 the economist and the Nobel Prize laureate, Paul Samuelson writes to Journal of Portfolio Management that the choice of a right moment does not work in investments. According to him, some self-assured investors alternated investments only into stocks to other asset classes depending on the own assessment of market prospects. Samuelson has come to a conclusion that their results do not advance the results of investors from 60% of a portfolio in stocks and 40% in bonds. At the same time, the second almost did not change a stock fraction. For a wide range of investors, Samuelson recommends a portfolio, rather independent of the total market, which purpose is not the advancing of a specific index. It turns out, it is better not to spend time on the choice of a right moment. So, the best approach to investment is directly connected with careful research and discipline.