At Yeske Buie, we believe there is a science to investing. Unfortunately, much of what passes for investment activity has little connection to this science. To some degree, this comes from the natural human desire to “beat the system,” to gain some special advantage, to find the secret short-cut. But at the end of the day, we believe success in investing is more about discipline than it is about beating the system by picking hot stocks or timing the market. With this in mind, we share eight common investment habits to avoid to maintain a grounded and disciplined approach to investing.
1) Failing to Diversify
Diversification is an important strategy to lower the overall risk of an individual portfolio by investing in stocks and bonds that are categorized in different asset classes. Combining investments with low to negative correlations is a technique that reduces risk by having positions invested in different sectors. Arming your portfolio with securities that perform well when others perform poorly, and vice versa, allows gains and losses to offset each other therefore reducing the magnitude of volatility within a portfolio.
2) Buying High and Selling Low
It can be tempting to buy something that is doing well and to sell something that is doing poorly. However, this leads to “buying high and selling low” which inevitably results in realizing losses for a particular investment. This “trap” usually results from emotional investing and can be avoided by following your investment policies.
3) Using Past Performance as a Measure for Future Returns
There is a reason that it is a requirement for an investment vehicle’s prospectus and advertisements to have a disclaimer, in some variation, which says “past performance is not indicative of future results.” Just because something performed well during the prior year does not guarantee the same type of success in the current year.
4) Having Unclear Investment Goals
Not knowing why you are investing can cause unclear motives over your investment journey which often leads to buying and selling erroneously and not in service of a specific goal. Having clear goals while investing allows you to “stay-the-path” and avoid many of these mistakes mentioned in this piece.
5) Ignoring Your Risk Profile
Having a portfolio allocation that is too risky or too conservative for your risk profile can lead to severe emotional volatility. Aligning the level of risk you are willing to take with an investment allocation chosen is an important strategy to the overall wellness of your portfolio and your mental state.
6) Trying to Time the Market
Attempting to time the exact moment when the market is going to peak or dip is seemingly impossible. It is better to invest when you are ready to, rather than trying to wait for the perfect moment. Remember, hindsight is 20-20.
7) Buying Last Year’s “Winners”
Investment performance is based off many different interconnected factors and may lead to varying results year-to-year. The highest performing stock in the previous year could very well become the lowest performing stock in the current year.
8) Making “Trendy” Investment Decisions
Buying and selling based off headlines is often a result of emotional investing. Again, identifying your investment goals will allow you to stay steady through your investment journey and help keep you from making many of these mistakes.
At Yeske Buie, we mitigate these common investment habits by applying our evidence-based investment philosophy to each of our Clients’ accounts. This philosophy is rooted in a foundation of research and years of practical application and is monitored by our Financial Planning Team to ensure nothing slips through the cracks. We also emphasize the importance of financial literacy and spend a portion of our annual update meeting with our Clients reviewing our investment philosophy to keep them informed. As always, if you ever have a question regarding investments or our investment philosophy, please do not hesitate to contact someone on our team.