If you use a professional investment company, chances are you have more than likely already discussed many of these issues with your money manager. However, many self-directed investors have had to learn the hard way what pitfalls they should look out for. Knowing what the eight most commonly known investment mistakes are – can help you to increase the value of your portfolio and avoid costly and frustrating errors.
1 Miscalculating your lifespan and the lifespan of your investments. With today’s medical and pharmaceutical technologies, people are living longer than ever before. Have you properly calculated not only for a longer life, but also for the quality of your longer lifespan?
2 Confusing cash flow needs with income needs. Cash flow is the amount of money you will need or spend on either a daily, weekly or monthly basis. Income is the amount of money that comes in from all sources, such as rentals, investment dividends, retirement, employment, etc. There is a distinct difference between the two of these.
3 Overexposing your portfolio to unintended risks. Concentrating your portfolio in specific areas can cause unintended risks. If you have a high percentage of stocks that are sensitive to interest rate fluctuations or commodity prices, this can cause unintended concentration and undue risks.
4 Making investments based on widely known information. You need to know something that everyone else does not know. Use your instincts, experience, research and your own knowledge base to make investment decisions.
5 Not expanding to foreign securities markets. Remember the word DIVERSIFY – there are multiple innovative companies worldwide. Diversity in your investments is key to a successful and well-constructed portfolio.
6 Miscalculating or completely forgetting the fundamental importance of supply and demand. The fundamental rule of supply and demand affects everything, especially that of purchasing or trading stocks. When the demand is high, stock prices rise.
7 Improperly judging risks of short vs. long-term investments. Keeping a stock too long or not long enough can produce risk. Long-term investments usually have a lower return rate, shorter-term investments are frequently volatile and risk laden. Therefore, the intelligent investor has a diverse collection of both.
8 Overconfidence in your own investing skills. Everyone likes to believe they can invest without emotional biases getting in their way. The most successful investors are those that can emotionally detach from each investment decision and base each of their investment choices purely on economics.
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