Wondering why you’re short on your investment returns?
As an investor, do you find yourself with bad habits that keep you from enjoying great investment returns? There actually seems to be a tendency here for most investors to be unable to make any kind of money in the stock market. It appears that investment underperformance can be mainly attributed to emotion and ignorance. In life, when you don’t have the right tools to work with, you’re already at a disadvantage. So without the proper information and understanding to support your participation in an investment, you’re likely going to get into trouble. And by letting your emotions dictate your behaviors when it comes to the markets, you’re setting yourself up for potential disaster.
Do You Have Bad Investing Habits?
So where am I headed? I’d like to revisit some habits that I think some of us investors are prone to have. Let’s look at some investing “sins” that a lot of us are guilty of committing when we invest.
#1 Don’t be forgetful or lazy when it comes to your money.
If you have a tendency to let things slip your mind, or if you procrastinate and don’t have the energy to watch over your money, then don’t be surprised if you don’t do too well in the financial front. If you find yourself wondering why you don’t have more in the bank, could it be that you may be short on effort? Lots of people will say “it’s not rocket science” to deal with your personal finances, but there is some work you’ll need to do in order to maximize your income and net worth potential. Some tips in that vein:
- Bank some savings at reputable institutions.
- Put some effort in choosing the right investments for your savings.
- Invest early and regularly.
- Watch over your investments and make sure you’re on track to reach your goals.
- Ensure that your investments are at par with their corresponding benchmarks.
- Evaluate your investments regularly and make adjustments to them when necessary.
You may think that buying an investment is enough to guarantee you some capital growth. In reality though, you’ll need to keep track of how your money is doing on a regular basis to ensure that you’re getting the returns you expect. Don’t just tuck your money someplace and leave it to the market Gods to deal with. Investments can be handled passively, but make sure you don’t completely forget about your accounts for long periods of time. Don’t let your accounts grow cobwebs!
#2 Watch out for clutter in your portfolio.
I can be compulsive at times. And that was evident when I first got introduced to the stock market and I thought it would be fun and smart to research and collect a variety of mutual funds with fabulous returns to boast. For a young investor, what could be more exciting than holding a piece of every “Best Of The Year” mutual fund that made it to the top of most money magazine rankings? Well I realized the error of my ways not long after, when my over-enthusiasm over stocks got the better of me. I ended up opening a lot of accounts in many mutual funds because I couldn’t limit my choices to just a few funds and because I was way too eager to chase returns. I ended up with a very cluttered portfolio as I took the clause “the more, the merrier” way too literally.
Ultimately, I had to do a lot of cleaning up and consolidating, which was work I “invented” for myself. With this experience, I learned how important it was to keep it simple, sweetheart . I’m bigger on simple and clutter free portfolios these days. And forget “Best of the Year Funds”, I prefer funds that can yield long term average returns.
#3 Don’t be an obstinate investor.
If you’re stubborn, inflexible and set in your ways, you may find these traits working against you when you’re building your portfolio. It’s just that portfolios work best when they are well-diversified and carry representation in various investments. If you tend to keep buying the same types of investments because you’ve decided to stick by “what you know” or because they fall within your comfort zone, or because you’re just plain superstitious, then you’re doing yourself a disservice. Nothing wrong with being able to sleep at night by buying into the stuff that you know best, but just make sure you’re not overdoing it. Too much concentration on one type of investment has its perils: you may be taking too much risk, or way too little risk, thus impacting your returns in a negative fashion.
If you do have a diversified portfolio and you’re interested in avoiding what is called “investment style drift” or “style creep”, which is the situation when your funds end up overlapping in style or becoming “redundant” in asset representation, then you can remedy the situation by reviewing your portfolio against a tool like Morningstar’s X-Ray Tool.
#4 Know whom to trust.
Do you work with a broker or financial adviser? Could they be someone in your family or someone who lives in your neighborhood? When you’ve got family and friends who work in the financial arena, you may count yourself both lucky and unlucky at the same time. You’re lucky because you’ve got yourself surrounded by knowledgeable “experts” and professionals in the financial field from whom you can derive usual information and valuable education. You’ve got some easily accessible and available brains to pick (usually). But you’re also unlucky because some of them may actually hit you up for your business and look upon you as a veritable lead or potential client whether or not you’re okay with it. When they get their talons on you, you could be in a bind: this typically occurs if your friend and family member is new to the financial business and is just beginning to establish themselves in this realm. It is very likely that they’ll use you as a guinea pig, whether or not it is intentional. You can very well be part of their learning curve, if you do agree to sign up with them, perhaps out of obligation.
If someone you know does end up soliciting your business, it’s best to be honest with them. In my case, I am frank with everyone whom I deal with on a business level — I tell them that I don’t mix business with friendship or family, unless we’ve got a binding contract and that we can ensure a win-win relationship. Thus, I only sign up with financial professionals in my family:
(a) who can offer me a good deal,
(b) whom I know has the experience and expertise to deliver and
(c) whom I can really trust.
#5 Don’t be an emotional investor.
Don’t confuse investing with “playing the market”. If you’re the type of investor who wants to take things into your own hands, your concept of investing is most likely to be the “active” kind. The kind that involves dodging market slumps and anticipating rallies, even making concentrated bets on the “hot” market mover de jeur. If you’re confident, impatient, want to make money quickly, have a penchant for risk taking, and are putting your money in the market, chances are that you aren’t really an investor, but rather a trader. But for most people, time has a way of changing their minds. If you’re like most people and you decide to stick with the markets, there will probably be a point in time when you decide to dial down the trades and instead move on to more passive investing styles. At least I did!
The 7 Deadly Sins of Investing
If you’re interested in additional material on behavioral finance, then I’d like to present to you a book that has inspired this post to some degree. It takes the idea of “bad habits” a step further by introducing the idea of “investing sins”. If you don’t mind a book that is mildly tinged with “religious” references, then this should be a good read. The book’s main question is: Are you a sinner? That is, when it comes to investments…
Here is a quick look at some of the chapters on this book, called The Seven Deadly Sins of Investing by Maury Fertig:
Envy: The stock is not always greener in someone else’s portfolio.
Vanity/Pride: It goeth before a fall.
Lust: Are you losing perspective and control over your investments?
Avarice: Even King Midas didn’t have the touch.
Anger/Wrath: Don’t get mad, get even.
Gluttony: How not to consume the market before it consumes you.
Sloth: The cost of being lazy.
Sinful Situations: Be aware of events and environments that tempt investors.
And yes, I agree with the very last chapter — we are indeed all sinners, but some of us can be saved… And it all starts with confession and repentance: if we can recognize some of the wrong-doing we’ve been subjecting our money to, then we’re one step closer to making portfolio improvements, and subsequently to redeeming our financial track record.
Image Credit: ChrisHallSculptures.co.ul; Created: May 30, 2008; Updated: May 3, 2011
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