In our personal lives, we have a conscience that keeps us from doing not-so-nice things. Sometimes we even get a creepy-crawly feeling when we think someone may be up to no good.
Fortunately, there also are some common red flags that warn us about things we should avoid when investing. For example, it’s usually not a good idea to buy a stock just because “everyone is doing it.” Not only does herd investing run up the stock price, but not doing your own due diligence can often lead to a poor result. While it’s best to buy into a stock position when prices are down, you should check and see how long and how often that price is depressed. What looks like a good deal could just be a perennial loser.1
By the same token, buying a stock just to chase performance is a common mistake. If you have some good performers in your portfolio, it’s usually a good idea to periodically rebalance so that your asset allocation doesn’t get out of whack. Don’t get so caught up in gains that you forget about the risks involved.2
Making mistakes is often all too easy for investors — that’s why we recommend you work with a financial advisor. If you don’t work in this industry, it can be difficult to understand the full scope of what can go wrong until you experience it yourself. And when it comes to your investment portfolio, you don’t want to learn by trial and error. Don’t hesitate to schedule an appointment if you’d like some guidance as you build your net worth.
Another illusion investors may experience is the need to maximize their portfolio. In other words, everything should be gaining all the time. Unfortunately, unless you’ve got a crystal ball, that’s not how the stock market works. Develop a strategy and stick with it, and that may mean selling when you hit certain price points or your asset allocation gets skewed in the wrong direction. The opportunity to cash out for substantial gains is one way to help maximize your investment.3
Recognize that the stock market is like a roller coaster, and upward rides eventually come back down. The best way to deal with a decline is to have a plan. For example, don’t “panic sell” — it could just be a short-term blip. Evaluate how much you believe in your investments, and prepare to dig in for the long haul regardless of volatility. Finally, if you do decide it’s time to cash out of some positions, it may make sense to use that as an opportunity to buy into other investments you’ve been considering.4
Also, don’t confuse investment success with some sort of wunderkind prowess. Markets are cyclical; they’re going to go up and down no matter what you do. If you deploy some basic financial strategies like automatic contributions, diversification or periodic rebalancing, you give yourself the opportunity to slowly build wealth without succumbing to dramatic fluctuations. While you may not become a Wall Street genius, you certainly have the potential to build a healthy retirement portfolio.
And finally, work with a financial advisor you trust who has your short- and long-term interests at heart and explains things in a way you understand. If you’re not comfortable with your advisor, you may get that creepy-crawly feeling mentioned earlier. Pay attention to any red flags.
1 John Csiszar. Go Banking Rates. March 28, 2019. “17 Warning Signs of a Bad Investment.” https://www.gobankingrates.com/investing/strategy/warning-signs-bad-investment/. Accessed July 5, 2019.
2 Elvis Picardo. Investopedia. June 25, 2019. “Common Investor and Trader Blunders.” https://www.investopedia.com/articles/active-trading/013015/worst-mistakes-beginner-traders-make.asp. Accessed July 5, 2019.
3 Quick Sprout. April 4, 2019. “7 Lessons Learned From Losing $739,135 In Bad Investments.” https://www.quicksprout.com/7-lessons-learned-from-losing-739135-in-bad-investments/. Accessed July 5, 2019.
4 Shawn M. Carter. CNBC. Nov. 20, 2018. “3 things you should never do when the stock market tanks.” https://www.cnbc.com/2018/10/11/when-the-stock-market-tank-dont-do-these-3-things.html. Accessed July 5, 2019.