When you want to manage finances, there are three investment errors that we want to share with you in this article. The following mistakes are often made by new investors and must be watched when you want to choose stocks, bonds, mutual funds, and other assets. Aside from that, make sure you learn about mis-sold investment as well.
Investment Error 1: Spread Investment Too Thin
One of the basic rules of investment is to diversify. However, in order to succeed well, diversification must be done correctly.
In fact, many people actually make mistakes in diversification.
Like everything in life, diversification can be done excessively.
If you divide 1 million into one hundred different assets, each asset will only have a small impact on your portfolio.
In the end, brokerage fees and other transaction costs may even exceed your investment profits.
Investment Error 2: Don’t Consider the Horizon of Time
The type of assets in which you invest must be chosen based on the time frame.
Regardless of age, if you will need money in a short time (one or two years, for example), avoid investing in stock markets or stock-based mutual funds.
Although this type of investment offers long-term wealth-building opportunities, stocks often experience short-term fluctuations that can erase the value of the investment if you make liquidation in the short term.
Conversely, if your time horizon is greater than ten years, it doesn’t make sense to invest most of the funds in bonds or fixed income investments, unless you believe the stock market is too “overvalued.”
Investment Error 3: Trading Often
When investing in stocks, your profits are related to the condition of the company.
The shareowner is the owner of a portion of the company, so if the company earns a profit, you will also feel it.
Therefore, an investor after choosing a company he deems good does not need to do anything except to do a dollar cost averaging, reinvest dividends and enjoy his life.
Daily stock movements do not interest him because he does not intend to sell. Over time, smart decisions will pay off as the value of shares increases.
A trader, on the other hand, buys a company because he expects stocks to experience price increases.