Investment mistakes cost dearly, so they should be avoided. There are two ways that can be used while gaining the necessary experience to minimize these:
Smart Way: Learning from other people’s investment mistakes.
Expensive Way: Being hit hard by making your own investment mistakes.
Obviously, nobody prefers to harm themselves and their investment. So learning from other people’s investment mistakes is the most efficient learning method possible. Learning indirectly reduces your risk of loss, so you have more profit opportunities and speeds up your journey to financial freedom.
Let’s review the twelve biggest investment mistakes we have seen with our investment engineering approach and the experience we have gained from our customers, who we have been coaching investors for years.
Advice 1: Diversify
Diversification is an important risk management tool, but only when used appropriately. Diversification becomes important only if the new asset to be added to the portfolio has a different risk profile.
For example, when diversifying a portfolio of stocks, unrelated markets such as gold, foreign exchange, real estate, bonds, commodities and futures contracts with low or inverse correlation or other asset classes can be considered.
Do not invest in similar products with the same risk and profit rate. Diversify, the average does not mean to add more assets with similar risk profiles. For example, adding various equity mutual funds to an already diversified portfolio of stocks does not diversify.
When diversifying, your goal should be to add independent and sometimes even contrasting products. This can reduce your risk and possibly increase your overall return when combined with other recommendations described below.
Advice 2: Buying Stocks – Portfolio Distribution Matters More
As many studies have shown, 90% of the main focus in portfolio diversification should be devoted to asset allocation. But what’s surprising is that most people make mistakes and spend 90% of their efforts on the remaining 10%.
Instead of spending all your time on decisions that will make little difference to your overall performance and constantly trying to choose the next favorite stock or fund, spend your limited time and resources setting the right ratio for asset classes and strategies. As a result, you will be running Pareto’s Law (the 80-20 rule, where 80% of the result consists of 20% of your efforts) for yourself.
Advice 3: Don’t Mix Future Expectations with Historical Returns
Just because your investment advisor tells you that their average historical returns from the stock exchange are around 10% year-on-year (or 7% or 8% depending on dividends, inflation and time), that doesn’t mean that this ratio will be similar every year.
The future can be very different from historical averages and the length of time you hold an investment may not be long enough to increase the average return. For example, most historical studies are based on an average holding period of 30 years or more for long-term stock returns. Even if your investor career is 30 or 40 years, your average holding period will likely be less than half that period, or even less than 1 year for some typical BIST investors.
Most of your savings are usually accumulated late in your career and spent during retirement. Almost no one starts making a large amount of risky investment at age 30 and retires at age 60 for that investment to constitute a 30-year period.
In addition, the current investment climate can be quite different from the “averages”. For example, a small number of investors are taught that the returns on stocks are inversely proportional to the valuation at the beginning of their holding period.
In other words, if stock values are higher than average when you start investing, you should expect 7-15 years lower than average returns. Or on the contrary, if stock values are lower than average when you start investing, you can reasonably expect 7-15 year returns to be higher than average.
Advice 4: Don’t Invest Without Plan
Don’t make the mistake of spending more time on your vacation plan than planning your financial future.
Many research results have shown that people who make a written investment plan and think methodically outperform those who do not, not just by a few points, but by times. By creating a disciplined plan based on mathematical expectations, you can avoid leaving your job to chance or instant decisions.
There are many prospective investment strategies, but it takes many years of disciplined practice to eventually become a winner. This means that instead of investing in rumors, clues, assumptions, predictions for the future, or the expectation that the market will rise, you need to have a strategy and path plan for different possibilities.
As a result, your financial security is paramount.
Advice 5: Don’t Forget to Invest in Your Financial Education
Before you win, you must learn. Every investment you make in yourself will pay you a lifetime dividend. Because investing can be complicated even than doing brain surgery.
The right investment is both an art and a science. Therefore, you should be wary of semi-facts and oversimplification that do not fit into the complexity of the process.
Investing is an art because we are all emotional people under the guise of rational decision makers.
Our decisions are influenced by our values, moods, herd psychology, past experiences, greed, and fear. Still, we continue the illusion that we are investing in a logical way.
Investing is also a science because diversification requires an appropriate strategy based on demonstrable scientific principles of asset allocation, valuation, correlation, probability, and much more.
To be a stable and profitable investor, you must balance art and science. As you develop your knowledge of investment strategy, you should work on yourself to improve your decision-making process.
When it comes to investment, “knowing little” can be dangerous, and “too much knowledge” can be a profitable thing. So invest in your financial education and it will pay you a lifetime dividend.
Advice 6: Remember to Match Your Investment Style with Your Personal Goals
Don’t make the mistake of discovering later that the ladder is leaning against the wrong wall. There is no single investment strategy that will ensure financial success for everyone, but there is an ideal right answer that is right for you.
Your task; Finding a way to do justice to your skills, resources, goals, values and risk tolerance so that you experience personal success and satisfaction by achieving financial success.
Just because other investors have made millions with their own strategies does not mean that you can earn too. Your journey to financial freedom consists in discovering which route suits you perfectly.
Advice 7: Beware of Low Liquidity
While a liquid investment can easily be converted into cash, there are things that prevent an illiquid investment from being easily converted into cash.
Examples of liquid investments are government bonds or large, stock-traded company stocks. Illiquid investments include corporate partnerships, under-traded stocks and real estate.
Loss of liquidity can cause large losses and financial failures. The reason is simple: Ultimately your most important risk management tool is to protect your investments from loss of control, but insufficient liquidity can lock you into an investment, causing losses to be unacceptable.
Never accept low liquidity unless your potential profit is too big to cover that extra risk you have taken. Do not give up liquidity unless you have other risk management disciplines to compensate for risk loss for an investment.
Advice 8: Be Vigilant About Overly Vigilant or Risk-Taking
The essence of investing is to balance earning opportunity with risk, and the better you manage risk, the more earning opportunities you can get.
The purely tech stock or the person investing in new trends and the purely time depositor are the opposite poles of the same extreme thinking, because neither of them are balancing profit and risk to maximize their long-term assets.
There may not be a safer place for a ship than in port, but ships are not built to wait in. Likewise, it would be imprudent to take the ship out of the harbor during a storm.
When the earning opportunity is worth the risk, you should invest aggressively and when the risk is high you should be able to protect capital by keeping the safe cash equivalent.
There is always an exit for every investment so you can protect capital when the storm hits.
Advice 9: Manage Risk by Evaluating the Entire Market Cycle
A rising tide lifts all the boats, but when the waters recede you see who is standing naked in the water.
The ability to save capital or even profit when market conditions are unfavorable is where you separate the novice investor from the talented investor. Effective risk management discipline is what needs to be done to manage loss at an acceptable level.
Investment results should be traced through the entire market cycle, including both the bull and the bear market, as short-term results in one-way markets can lead to false conclusions.
Advice 10: Don’t Mix Value Added With Total Return
When evaluating investment results, don’t make the mistake of just looking at how much money you’ve made.
Because the total return; It consists of a mix of market return, style return and management skill. Looking at the total return without isolating the source of the return will result in inaccurate results.
The true measure of investment ability is value-added return, which is determined by comparing the total return against an appropriate indicator index over a full economic cycle. By doing this, you separate style return and market return from management skill.
For example, 2 people with annual share earnings of 25% and 32% may have failed 5% more and 2% more success, respectively, in a year when the index grew by 30% on average.
If your trading style is inherently bullish, you may perform well in risky markets, but you may have suffered severe losses in falling stock. The performance of the full market cycle is how you determine investment skill and added value according to the appropriate indicator.
Additional Advice: Enjoy The Investment
Investing is fun because wealth is not only a destination to reach, but a journey to enjoy. It’s a lifelong process that doesn’t end until you die, so you also understand how to enjoy the road itself.
The investment results of those who are worried about investing as a chore often reflect this lack of enthusiasm. Seeing investment as a disciplined but enjoyable adventure creates endless opportunities for mental and personal development. The right attitude will also lead you to financial success.