While you’re creating your first portfolio, it can be hard to avoid a lot of mistakes. Beginners may think they’re doing the right thing until it’s too late. These are some common portfolio mistakes you can avoid by knowing about them.
Not Having a Plan
The biggest portfolio mistakes happen by not having a clear plan. A personal investment plan or policy should address goals and objectives, possible risks, appropriate benchmarks, asset allocation, and diversification. Written guidelines are the best way to help you adhere to a sound long-term policy -- even when the market conditions falter -- and analyze your plans to make sure that you can follow through and the goal is reachable. Otherwise, you may be in for significant losses.
Not Knowing Your Time Horizon
A time horizon is the amount of time an investor keeps their assets. For day traders, it could be a few minutes or a few seconds. On the other hand, some people invest to save for a retirement plan, which means they could have a time horizon of several years. Different investments have various types of time horizons. If you intend to save for your retirement, this year’s stock market fluctuation shouldn’t be your biggest concern. Additionally, you need to consider your living situation. Starting a retirement account that will create profits in 15 years when you want to retire in five may not be the best plan.
Paying Too Much Attention to Financial Media
Financial news may be a source of information, but it doesn’t usually help an investor achieve their goals. Very few newsletters can provide value that can assist you in investing. Beginners should especially avoid media offering a secret answer to make you a lot of money in a short period of time. If someone has a formula that will make them enormous sums of money, they aren’t going to sell it. They’d make their millions quietly.
Not Diversifying Enough
As someone that’s just starting out, it can be hard to spend a lot of money on stocks and other assets that may not perform well. Investors may think it’s better to put all their money in one security that way the profits will skyrocket when it performs well. However, what happens when it performs poorly? The investors lose all their money. By diversifying, or investing in several securities, an investor decreases the amount they’ll lose. If one security does badly, another may perform well or hold steady. The loss is reduced significantly in this case.
Buying High and Selling Low
Maybe you’ve had a stock, and it’s performed well within the last week, so you have the urge to sell. Yet, holding onto the investment could result in higher gains in the future. In two weeks profits could even double. On the other hand, an investment that is decreasing in profit may encourage someone to sell without a second thought. Without researching, you may be losing the opportunity to make a potential profit. Some assets are highly volatile and can be bad one week and great the next.
