A lot of people suddenly started investing during the covid period. This includes the newbies. Unsurprisingly, most of them started investing just because. Some are because of FOMO. I have talked to some of them, and majority stopped when things going down. Basically, they invested when it was reaching the peak. So what happened to their portfolios? Some decided to leave them alone, considering it’s only low amount invested, the rest cashed out their losses and decided not to touch anymore.
What about those that somehow still survive? You can easily go to forums, especially in Singapore it would be Seedly (not sponsored) and you can see the amount of people asking what is a good buy, whether it is a good time to invest or sell, etc.
Well, I believe you get the picture now. Investing requires you to do your own homework to have that conviction. There is a reason why people make it in the long run, maybe even the short term because they do their homework for like hours, maybe even months. I have personally met traders that just told me in my face that they just don’t believe in investment. Why? Because they make big money in their trading! But of course, trading is much harder as compared to investing.
Investing can be a powerful tool for building wealth and securing your future. Yes, I know. Everybody likes money. Yet, for beginner investors, the journey can be fraught with hidden dangers. Unfamiliarity with the market, emotional decision-making, and common missteps can lead to costly mistakes that erode returns and hamper long-term goals. Not only that, it can even affect the person in such a way that he/she would never come back to investing anymore.
So, here are some of the most common pitfalls that can snag your portfolio and delay your financial freedom:
- Blindly chasing trends
- Fear-Driven decisions
- Failing to do your homework
- Letting emotions rule
- Ignoring diversification
- Neglecting to rebalance
- Ignoring fees
Let’s get into them!
1. Blindly Chasing Trends
Like moths to a flame, newbie investors are often drawn to the hottest trends and “get rich quick” schemes. Investing in the latest fad without understanding the underlying fundamentals can lead to devastating losses when the bubble bursts. Remember, sustainable wealth doesn’t come from quick flips but from careful research and long-term strategies.
To be frank, I have mentioned how I don’t believe in get-rich-quick schemes to whomever I have met out there, but there are about 8 billion people in this world. That’s why scammers are still successful until this day. What’s more insane is how the same people that I have warned, I have told them to do the proper way, mentioned to me that they understood where I am coming from, but still fell for these scammers just because they thought they could double their money overnight, as compared to the longer wait that at least, have had a history behind them. I am just at a lost of words.
2. Fear-Driven Decisions
Panic selling during market downturns is a classic beginner blunder. Investors forget that market fluctuations are inherent to the game and succumb to fear, locking in losses they could potentially recover over time. Sticking to your investment plan with a long-term perspective will help you weather temporary dips and ride the waves of the market.
Personally I fortunately have not done this out of fear. However, I had done a simple game with people by just asking them when to buy or sell according to them after flashing them a chart of the past. It is very obvious that people played it with their logical mind. However, it is very contradictory whenever I asked about their personal portfolio. It will either be them selling off just so they can at least get what money is left, or they just left it be when there is just a small sum of money and wait it out without doing anything, just sitting on the sideline forever kind. I mean, this will not get you anywhere.
3. Failing to Do Your Homework
Investing, like any endeavor, requires careful research and due diligence. Beginners often jump into investments without understanding the company, the industry, or the associated risks. Taking the time to analyze financial statements, assess management teams, and research market trends can make a world of difference in selecting winning investments.
To be honest, I was guilty of this. I always thought I might miss the timing especially when it was going down, thinking it would go up soon and I would ended up buying without thinking twice. Now, the difference was that I was into the companies that I am familiar with. However, this doesn’t mean that the company is doing good. The company might not collapse anytime soon, but that lost in price going further down, can actually cost you more in terms of your return.
However, imagine you are investing into something that you don’t know and purely based on hype. Yes, most likely you can just kiss it goodbye. I met such people before when I looked at their portfolio and I asked what do they know about the companies they invested in, most of the time they wouldn’t know one or two of them and just invested because their “friends” or “siblings” or whoever told them so. This often left them in regrets.
4. Letting Emotions Rule
Greed, fear, and excitement are powerful emotions that can cloud your judgment and lead to irrational investment decisions. Investing should be a calculated and dispassionate process, not a rollercoaster ride of emotions. Develop a disciplined approach based on logic and research, and avoid impulsive decisions driven by emotional impulses.
However, this is often easier said than done, yet people often belittle it especially the newbies. Personally, I experienced fear when I was doing trading. Greed is the emotion that I experienced the most. My experience working as a consultant though, taught me that being logical really is the best way because it felt like I could see through some stuff and most importantly, you can execute based on what your system says. If you would like to bite the bullets and take the losses for greater good, you often can do so if you just follow your own logic and research.
On the other hand, if you are emotional, you most likely won’t be able to pull through. Sometimes, it happens without you even realising. What I mean is that you might think you are thinking it through, but it is actually your emotions that make you justify your thinking unnecessarily. So, be aware about this.
5. Ignoring Diversification
Putting all your eggs in one basket is a recipe for disaster. Beginners often over-concentrate their portfolio in a single stock or sector, exposing themselves to excessive risk. A well-diversified portfolio across different asset classes and industries mitigates risk and smooths out market volatility, providing a steadier path to growth.
And this, is actually more difficult than you think. Or rather, it is a more common mistake that one thinks. I mean, I have met people who think that REITs are different from equities or stocks, hence they are diversifying. That is not, by the way.
Diversification is broad. It can be in terms of assets, geography, country, etc. So yes, especially if you are just a normal investors, please do consider diversification. There is already statistics and data about it whereby it can help to reduce your risk.
6. Neglecting to Rebalance
Your investment needs and risk tolerance evolve over time. A portfolio perfectly balanced years ago might no longer be suitable for your current situation. Rebalance your portfolio regularly to ensure it is consistent with your goals and risk tolerance, and make strategic adjustments as markets change.
And this stands through. You might not need to rebalance very often, like every week or year, but you definitely need to rebalance like once in a while it depends on yourself, your goal, and your horizon. This will definitely help you to realign things to your desired outcome.
7. Ignoring Fees
Those seemingly small fees can chip away at your returns over time. Hidden charges, commissions, and account management fees can add up significantly, silently siphoning off your profits. Be mindful of all costs associated with your investments and seek out low-fee options that maximize your growth potential.
However, do bear in mind some fees might be necessary if you feel that it helps you to do better. Otherwise, accumulative fees do chip away at your returns. Do consider carefully.
These are just a few of the common pitfalls that can sabotage your investment journey. By being aware of these mistakes and making informed decisions, you can build a robust portfolio that withstands market fluctuations and delivers consistent returns over the long run. Remember, investing is a marathon, not a sprint. Patience, discipline, and a well-thought-out strategy are the keys to unlocking your financial freedom.
Wrap Up
People are always looking for ways to get more returns. However, in the current market, we have to be very careful and not just blindly follow. On top of that, one has to think through before succumbing to your own emotions.
With that, thank you for reading. If you think these might be helpful to other people, feel free to share. Also, I am not a professional and this article is by no means an advice to buy nor sell. Always do your own research. Believe in yourself and not other people.
Thank you for reading.
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