In a recent study, more than half (52%) of respondents stated that they were either “far” or “very far” away from achieving their first investment goals. Whether that goal is setting aside funds to start a new business or to save up enough money to send their child to college, why are so many people failing to reach their ambitions and settling for less?
Well, the answer is simple. Investing is hard. The most successful investors aren’t born overnight. It takes time, patience, and trial and error to learn the ins and outs of the financial world and establish a strategy that fits well with your personality as an investor.
To make matters even more complicated, your expenditures, lifestyle demands, health, family size, risk tolerance, and income all fluctuate over time, necessitating flexibility and the ability to adapt your strategy as your living circumstances change. After all, investing is a marathon, not a sprint, and if you want to make it to the end, you must run a smart race. With that in mind, here are three of the main things that could be stopping you from reaching your investing goals and what you need to do to avoid them.
You don’t have a strategy
These days, there are many various ways to make money in the market. That’s why it’s easy to become overwhelmed by the sheer amount of investing possibilities, especially if you don’t have a strategy in place from the very beginning of your journey.
Here’s the thing: you’re the only person on the planet who truly understands your personal situation. This is why you must be honest with yourself to determine the ideal approach that is realistic and most likely to help you achieve your objectives. A solid investment strategy should:
- Fit with your personality type
- Match your level of skill
- Be realistic and achievable with your current and future lifestyle requirements
- Cater to your level of risk tolerance and appetite for sustaining losses
Your investment journey begins with a strategy and a timeline; once you know how long you want to invest and what you want to accomplish with your investment, you can put the framework in place to make it happen.
Make sure you understand that investing is a long-term journey. If you do, the less likely you are to get tripped up by minor setbacks and short-term market crashes; always keep an open mind, learn from your failures, and don’t be afraid to tweak your strategy as your circumstances change.
You let your emotions rule your head
The truth is that a fully automated investment strategy can help you achieve high returns in the market, but the most significant roadblock you’ll face is your emotions, which will battle you tooth and nail along the way.
Both beginner and seasoned investors are guilty of letting greed and fear get in the way of their decision-making. This leads them to make poor decisions in the short term that will have a profoundly negative impact on their long-term investing returns. Things such as impatience, overconfidence, panic, and frustration will all eventually lead to financial ruin, which is why they have no place in your investment decision-making process.
Intriguingly, a study published in the Journal of Financial Planning indicated that investors who employ a behavior-modified, emotion-free approach to investing had returns of up to 23 percent greater over ten years. That’s a significant amount of profit you could be missing out on. Here a few quick tips to help you keep check of your emotions when investing:
- Don’t fall in love with a company
- Don’t chase your losses
- Be patient and play the long game
- Don’t attempt to time the bottom or top of the market
- Don’t FOMO into a position
Another great tip is to always do your due diligence when it comes to where you source your financial news/information and reviews on products and services in the industry. Instead of blindly following advice from a friend or a colleague, you should always aim to get your information from objective, unbiased sources such as Investimonials so that you can be sure the information you are receiving is trustworthy.
While many investors out there (such as Warren Buffett and Charlie Munger) argue that “diversification is protection against ignorance,” that logic is simply not true when it comes to the everyday investor.
While professional investors may be able to generate a great return by investing in only a few concentrated positions, the vast majority of people would be far better suited to having a well-diversified portfolio. This is because diversification provides many benefits that suit the average investor, such as:
- Reduces the chance of losing your entire investment
- Increases your chances of making a profit and exposes you to more opportunities for finding a healthy return
- Protects you from market downturns
- Reduces exposure to volatility
As a general rule of thumb, you should not allocate more than 5% to 10% to anyone’s investment, and you should diversify among different asset classes too.
While mistakes are unavoidable in the investing process, it’s critical to minimize the damage they cause if you want to achieve your long-term financial goals. The good news is that if you create a sensible, systematic strategy (and stick to it) while removing your emotions and ensuring your portfolio is adequately diversified, you’ll be well on your way to building an investment strategy that will bring many positive returns and help you reach your investing goals.