This is the time to check some very common behavioral mistakes during market highs, the investors are most prone to commit. You as an investor is not alone. There is a constant fight between self (mind, emotions) and outside world (peer pressure, media). Here are few things that you can avoid:
Churning/Overtrading
The financial media promotes action resulting in churn or overtrading. Because if you’re not trading you’re not earning, right? Wrong.
Media pundits create exciting stories about where markets will move and why. For many investors, the desire to play outweighs the desire to win. They try to break boredom by making trades and hopping on the latest hot tips.
The best traders are much less active than you’ve been led to believe. They aim to profit by riding long-term trends that play out over months and years, not minutes and hours. Trading on such short time frames gets you nowhere.
A good investor does not make predictions, but they follow trends. They do not let short-term volatility shake them out of their positions. They do not feel the need to trade every day, every week or month; only when they see opportunity.
You keep losses running
You must have an exit point for every investment you hold. This can be your goal completion timeline or an event in mind. Without one, whether you admit it or not, all of your money is at risk.
You should know when to let it go. This goes for everything in life. If a certain food doesn’t make you feel good you have to stop eating it. Move on with your mistakes.
When you let losses run, you waste resources – namely, time and money. But you also miss out on other opportunities. Exiting losing investments frees up your capacity to be deployed to new and possibly better opportunities in other markets or stocks.
Exiting Winners too soon
As the old saying goes: “If it ain’t broke, don’t fix it.” Investors are too eager to book gains, especially those that come quickly. Your advisor is a human too and fearful of his performance, so he will also make you book profits.
Our lizard brain likes being right and feeling smart. When one of our investments shows a profit, our lizard brain wants us to quickly put that in books. This behavior comes at a cost though. Like pulling our flowers before they bloom, cutting winners inhibits us from generating huge gains.
If you want big profits, you must hold your winners and let them grow. Investments do not always grow into big winners, but you allow them that chance. One or two big winners can make your years gain.
Forgetting your Risk Tolerance
If you know how much pain you can take, you increase your odds of survival and winning.
Knowing your pain threshold allows you to grow at your desired speed. You should know the amount of equity you can hold. Also, you should be aware of the downside you are willing to see in order to take more risk.
If you want to grow fast, you must take on more risk, but with more risk comes higher volatility and larger drawdowns.
The most important benefit of knowing your risk appetite is that you have lower stress. There will be a lower risk of aborting your long term plans. You will be more capable of setting and managing performance expectations.
Not diversifying. Concentrating on high gainers only
People prefer picking winners and betting it all. The possibility of making a lot of money in a short amount of time attracts many people to this strategy. This is completely wrong in investments.
In most years, a diversified portfolio rarely beats the absolute performance of the best performing market(s) or stock(s). But can you pick the best performer?
So, the best way is to strive for steadier long-term results by building a portfolio of different markets and strategies, instead of attempting to catch a big winner.
This strategy of concentrating your portfolio places more emphasis on market-timing instead of diversification.
Rather than trade one market and experience all of the swings in that instrument, diversifying helps create a smoother ride.
Aiming for 100% winners
Winning percentage matters, but so does the size of your winners.
The combination of your winning percentage and number of funds delivering more than expected tells you if you have a good portfolio.
No one can accurately pick winners above a 70-80% rate for an entire career. This is not happening. Has never happened. Will never happen. And… it doesn’t need to happen.
The best traders can produce win rates of above 50% and still produce huge profits. How? Because the selection of fund is just 5% reason of your portfolio performance. Rest 95% is asset allocation and behavioral responses.
Giving ear and attention to Media News & so called “Expert”
Convincing media outlets can force you to jump off your plan, often at the wrong times.
TV and online personalities pitch their ideas every single day. Their job is to get maximum air time. Their strategy is selling certainty – making you believe they know what’s coming next.
Investors without a plan of their own become susceptible to falling hard for convincing stock picks – jumping from one idea to the next.
Media houses only focus on
- what shares or schemes to trade; and
- when to enter.
They never talk about position sizing, risk mitigation, alignment to overall portfolio or exit methodology to protect your capital if/when the market goes against you.
You must never be concerned with “Bungalows in Air” ideas. They first must have a financial plan of their own and then be able to tune out other people’s opinions. When you have a plan, you already have all you need to be successful.
The market is still to run for a considerable number of years. Your focus will impact your financial life. Normally an investor gets to see 4-5 markets cycles and this is one of the opportunity. Make the most of it by not committing the common behavioral mistakes during market highs.
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