For new investors, trying to outperform the market by buying individual stocks is a top mistake. That approach carries a lot of risk because, when the stock turns sour, novice investors have the tendency to hold off investing, forever. If it does work out, they can overestimate their stock-picking abilities and make even larger single-stock bets.
Whether it’s large, blue-chip companies, such as Disney or Apple or lesser-known firms the investor thinks will pay off in the future — this method of investing can waste valuable time that could have otherwise been spent learning about investing principles that actually provide value.
Choosing an investment manager based solely on his portfolio returns is not a good assessment of his performance. It would be to an investor’s benefit to study and understand a manager’s investment advice and thought process and persistence and ascertain whether that strategy matches his. Remember, past performance is not necessarily an indicator of future outcomes.
There’s a popular Chinese proverb that says, “The best time to plant a tree was 20 years ago. The second-best time is now.” People new to investing may be aware that the stock market is a good place to invest however they may not understand what it takes to build wealth - patience, consistency and more patience.
The stock market has its ups and downs, but rookie investors get tense when the stock market is rocky. They may be tempted to buy when prices rise and sell when they fall or to check their portfolios too often and panic at any sign of perceived market volatility. As Peter Lynch famously quipped, “It’s time in the market, not timing the market that matters.”
For starters, if a talking head on national TV is touting stock advice, one thing is for sure: you are not the only one listening. The minute a tip is broadcast it is old news that has been heard by thousands if not millions of other investors and, consequently, whatever minor edge it may have given you has already been eroded.
A lot of time is spent discussing investment manager performance but there is one aspect of investing that can make more difference on portfolio returns than any other — fees. Always ask what you are paying for. Fees (disclosed as well as hidden) can put significant drag on your investments over time. Do you remember those old investment legacy plans with the amazingly high management fees which provided close to zero gains for the first five years? Did people really buy those? Sadly, yes.
Make sure that you know what you are paying to invest. Having a transparent fixed annual fee on all your investments will eliminate your worries about additional hidden fees that you may incur.
The smart play is learning about investment strategies focused on sectors, diversification or asset classes. With an investment portfolio spread over many different securities, you can benefit from minimizing your risks while generating good returns. So even if one portion of your portfolio isn’t doing well, other areas can make up the difference. Diversification can help you to manage risk and reduce the volatility of your portfolio. Remember, however, that no matter how diversified your portfolio is, risk can never be eliminated completely. You can reduce the risk associated with individual stocks, but general market risks affect nearly every stock and so it is also important to diversify among different asset classes and geographies. The key is to find a happy medium between risk and return. This ensures you can achieve your financial goals while still getting a good night's rest.
Some types of investments may have tax benefits as well. It's important to check with your tax advisor to make sure that the products that you plan to invest in are tax-efficient in your jurisdiction.
The most important investment advice is, discipline is not easy. Despite best intentions and claims to the contrary, many investors chase performance, react emotionally to market moods, and in turn incur far more trading costs than good discipline would suggest. Even when there is a long-term plan in place, if it is not followed the plan is useless. Maintain your set portfolio through all market conditions – markets do not remain at their current levels for long, yet a portfolio should be maintained at roughly the same asset allocation through all market conditions. Rebalancing helps control the market allocation and an annual rebalancing can serve as the method to maintain a portfolio. Cash contributions and withdrawals also provide an occasion to rebalance.
In conclusion, investors who recognize investment advice and avoid focusing their efforts on factors they cannot control may give themselves an advantage in pursuing their investment goals.
While it is impossible to predict which direction markets will go, generally, each downside contains an upside potential somewhere else. With discipline and focus, you can strategically turn your goals into financial realities. If you have any questions or need financial advice please reach out to firstname.lastname@example.org and we will be more than happy to assist you.