Investing is supposed to be easy; you take an amount of money, invest it in the market, and let it grow in value over time.
If it is so easy, then why do so many people fail at it?
Here are 11 reasons why investors fail.
Hopefully you aren’t committing all of these mistakes.
If you commit any of them, take note of them and take action to correct them.
Reasons Why Investors Fail
- No Financial Goals or Change Goals Too Often. If you are going on vacation, you have a plan, right? So why wouldn’t you have a plan for your money? After all, a typical vacation only lasts a week while you want your money to last your lifetime, and possibly more. Sadly, too many people have no plan and simply throw money into the market, thinking they will figure it out later. Later comes, and they still have no clue. Sit down and think about what you want financially. Once you have an idea, create a plan around it and stick to it!
- Invest in the Wrong Securities. This doesn’t mean you invested in some now defunct internet start-up over Apple. What this means is you are invested in emerging market stocks when you have three years until retirement. You should have your money in more stable investments, such as bonds. Another example is having a portfolio asset allocation that is appropriate for your goals. If you are close to retirement, you should not be invested 100% in stocks. Understand what you are investing in. Stocks are for the long term, bonds are for shorter term periods.
- Invest Emotionally, Not Rationally. You see the market up 300 points and think you have to get into this rally or conversely, you see the market drop by 300 points and sell everything. In both cases, you are acting on emotion. Do your best to take your emotions out of the picture. Expect short-term volatility, because it will be there. But always remember that you are in it for the long term.
- Being Too Greedy. You see that Apple stock keeps rising so you go ahead and invest in it because you think it can’t lose. Or, you have lost much of your retirement savings in the past few years and to make up for it, you invest everything you have in technology stocks. Don’t be greedy. Stick to your plan. When you chase investments, you will get burnt. Trust me. I’ve done it and so have many others.
- Relying on Experts. Tune into the business channel and you will see some expert pumping up a stock. You think that it sounds good and invest in it. Bad move. No one knows how the market is going to react. There might be a short-term pop in the stock the expert is promoting, simply because so many others are blindly following their advice. In time though, the stock will return to normal. Stay focused on your goals and on the plan you created for yourself.
- Listening to Outdated Articles. With the internet, you can find a story on just about any topic you want. What you need to pay attention to is the timeliness of the article. There is no reason to get excited about what an article says if it is outdated. And with how quickly news travels, it can become outdated quickly.
- Becoming Overwhelmed. There are thousands of mutual funds, stocks and bonds to invest in. You could easily spend your entire life researching each and every one of them. Too many fall victim to analysis paralysis. This happens when you have so much information, you end up not making a decision because you are overwhelmed with it all. Search out low cost index funds and stop there. Pick a few that will give you the allocation you need for your goals and more on. No need to research until you can’t take it anymore.
- Investing to Save on Taxes. I hate paying tax as much as the next person. But there is no reason to invest in a security simply because it will save you on taxes. Realize that I am not saying you shouldn’t save in your 401k and IRA accounts. I think you should be contributing as much as the law allows you to. But don’t go investing in other products just for the tax savings. If they are part of your plan, then by all means, invest. If not, move on and invest to meet your goals.
- Investing on Margin. Many investors were burnt in 2008 because they have too much money invested on margin. If you don’t know what margin is, it allows you to invest in securities without having the cash up front. If the security increases in value, you can sell it, pay your outstanding balance, and keep the rest. Problems arise when the security drops in value. In this case, you don’t need to sell it in order for the lender to get his money. Once the value of the security drops below a certain point, you need to add cash to your account to make up for the difference. My advice: don’t invest unless you have the cash. If you don’t have the cash, then save up until you do. There is no point into going into debt to invest money.
- Not Understanding Compound Growth. The more time you have, the more your money can compound upon itself. Another way to explain compounding is that you earn interest on not only your principal, but also on the interest you have earned as well. As your investment account balance increases, the compounding of your money increases at a faster rate, earning you more money quicker. You won’t become a millionaire overnight, but your money will grow.
- Fixed Income Does Not Mean Fixed Value. If you are investing in bonds, also known as fixed income, your principal invested can lose money. There is no guarantee that you won’t lose money. Bonds are less volatile than stocks and as a result are less likely to lose value, but that doesn’t meant they won’t.
What are your thoughts on this list? Should anything be added or removed?