Investing isn’t easy, and there are plenty of traps that investors fall into all the time. Even the best investors are far from perfect, but by knowing where the most common pitfalls lie in wait to snare the unsuspecting, you’ll have a better chance of avoiding unnecessary mistakes. The following four mistakes are among the most prevalent, and fortunately, they’re easy to steer clear of if you’re prepared in advance.
1. Holding on to a losing stock in the hopes of breaking even
One of the hardest things for an investor to do psychologically is to sell a stock at a loss. Even if you’ve already lost money on a position in your portfolio, it’s tempting to hold on and hope for a recovery that will let the stock price rise back to what you paid for it. This anchoring bias takes your focus away from the actual company and instead leads you to pay too much attention to a particular share price that bears no relationship either to the current value of the stock or to its future potential.
The smarter thing to do with a losing stock is to pay attention to the fundamental prospects for the business. If a company’s business model is no longer sound, then the share price has fallen for a good reason, and it often makes sense to sell. After all, if you wouldn’t be comfortable buying additional shares now, there’s no reason to hold on to the shares you currently own. If, on the other hand, the business still has the same prospects for future growth, then holding on to shares can be the smart move irrespective of whether they rise to your purchase point or beyond.
2. Letting politics drive investment decisions
There’s no doubt that the political situation can have an impact on prospects for investments. Policies that a winning candidate supports can lead to the creation of programs and policies that have a positive impact on the private companies responsible for assisting government efforts or implementing new initiatives.
The common mistake that investors make is thinking that a candidate whom they oppose will cause the financial markets to lose ground. In 2009, many investors thought that newly elected President Obama would enact policies that would prevent a recovery in the stock market, but that turned out not to be the case. Similarly, the 2016 election of President Trump sparked initial panic in financial markets, but stocks turned around in less than a day and began a new stage in the rally that has sent major market benchmarks to all-time highs.
3. Trying to time the market
No one likes to lose money, and the idea that one can time purchases and sales to reap gains but avoid losses is very attractive. Market timing seems especially prudent when uncertainty suddenly hits the market, with some new event seemingly posing a long-term threat to the market’s stability.
Time after time, investors who sell at the first signs of trouble end up missing recoveries when a resilient stock market bounces back from potential turmoil. That’s not to say that markets never go down, and sometimes, pullbacks can be substantial and take a long time to play out. Yet it’s hard to be right about both when to sell and when to buy back into your position, and if you get either of those decisions wrong, attempts to time the market will prove costly.
4. Keeping an investment for nostalgic reasons
Many investors have stocks in their portfolio that have some personal meaning attached to them. You might have inherited a stock from a loved one, while another position might be the first one you ever bought. Yet the companies whose shares you own and the stock market at large don’t take your emotional attachment into account when evaluating that stock’s prospects.
It’s best to make investing decisions without any emotion involved. Some people have trouble doing so, and that can make it smart to get a professional advisor to assist in keeping your decisions unemotional. Sometimes, selling a much-loved stock can help prevent a painful financial loss.
How to get investing help from the pros
Investing can be tricky, and avoiding mistakes is crucial. By being aware of these potential miscues, you can put yourself in a better position to make the best choices with your portfolio.
What’s more, I can help you figure out if you’re trying to maximize your investing potential, and it all starts with giving your retirement plan a checkup – there’s no obligation, no hassle, and no pressure. Simply call me at any of the phone numbers listed below.
Douglas J. Sedam
The Paseo Financial Group, Inc.
27413 Tourney Road #140
Valencia, CA 91355
Phone: 661.295.2400 #1
Toll Free: 866.549.3900
Securities and Investment Advisory Services offered through Western International Securities which is a member FINRA/SIPC. OSJ Office: 19510 Ventura Boulevard #211 Tarzana CA 91356 (818) 996-3375 The Paseo Financial Group, Inc. and Western International Securities are unaffiliated companies.