In Brief: How to measure and control fear in your portfolio?
Investing can be hard and can be pretty boring sometimes. After reading a few tips from investment gurus, investing can sound easy. Setting up a diversified portfolio plan, and adding bonds, long-term, and short-term might sound possible.
Yet, when the whole thing starts to become a day-to-day task activity; investing steps tend to be fuelled with emotion. You will later find yourself getting excited, nervous, anxious, and impulsive. Then it is the sign to reconstruct your portfolio.
Yes, it is easier said than done.
Here are the 3 main common investor mistakes. You might consider taking a rest and start evaluating your portfolio. If the number still shows a green sign, then you are good to continue or you are doing more harm than good.
Trading too often
There is a mythical belief that the more you trade, the higher your return will be. It is simply not true. An action does breed results, as most successful investors are the ones that trade the most. However, in investment, making a winning trade once is always better than making an “OK” trade twice.
Don’t just do something, sit there. Wait for the right time before making any decision.
Trading doesn’t always mean spreading your portfolio with the commitment of ‘buy and hold’. There is a thin line between adding more stocks and stubbornly hanging onto everything you buy. Remember, a good investor is an investor who is disciplined enough to avoid jumping in when the hype is up and out of the market when the price at optimal.
If you feel that you had been trading furiously throughout the day, which includes placing a big order number for quick succession or letting go of any position as soon as the signal turns green. Do ask yourself, why are you doing it?
Giving yourself some space and doing full research on a stock before making any decision is essential. Getting ahead of that happening is half the battle.
If you are making trading decisions with short-term or contra setting in mind. Then, trading too often is great, as it ensures you are making appropriate decisions at the right time. Usually, contra trading requires an investor to sell off their holding with T+2. Thus, trading often helps an investor to always be in check with the deadline. On the other hand, if you are trading with a long-term timeline in a proposition, repetitive actions of trading aren’t likely going to help in wealth building.
Trading with emotions
Trade driven with emotion is a major red flag. It is often triggered by the need for FOMO – Fear Of Missing Out. Most investors govern their decision-making ability with FOMO as the human brain has the tendency to think that when everybody buys it, the stock must be good. This can lead to buying a stock that no longer has any growth potential.
The next emotional drive is letting fear take over by pressing the sell button. There are many investors who sell their portfolios after hearing some rumors and resulting in a losing decision. Always remember, stocks will always veer up and down, but if the stock you are holding had been in a stagnant position or continued going south. Then it is a sign that emotional decisions had beaten research.
Another emotional trading is when an investor starts to repeatedly sell an asset at a loss and repurchase the exact asset when it recovers. This is a common situation for crypto investors when they sell Bitcoin at a low price with the fear of the loss of value, then buy Bitcoin back when the asset has been on the rise. Basically, you’re letting fear overtake the ‘sell’ button and FOMO to handle the ‘buy’ button.
In reality, we tend to rely on our feelings when we didn’t do enough research and often make poor decisions when we get stressed.
So, how can you avoid emotional investing?
“Know what you own and know why you own it” – Peter Lynch, Investment Legend.
It is essential to understand how a company makes its revenue, what opportunities lay in the future, and what might cause the downfall of the company. By understanding these 3 elements, the decision-making process will be becoming a lot easier.
In this case, you’ll know how much profit you can expect from the company before you decide to buy the stock, as well as when the company can be a great selling point. Purely fact-based decision taken. No emotion, no jittery transactions.
You should always make it clear why you are interested in purchasing the stock and what your selling criteria will be. What are the factors that triggered your decision to add the stock ticker to your portfolio? Money really can cloud your judgment, thus knowing the exact motive, lets you have the upper hand.
It is not about jumping into companies after seeing their name with a lot of hashtags and rocket/moon emojis on Twitter. Then, hoping to find the stock to skyrocket without thinking further,
You are gambling, not investing.
Not doing portfolio balancing periodically
A lot of investors only look at their portfolios every six months to make sure the portfolio ratio still suits their risk tolerance and also whether the companies are in line with what they’re expecting or not.
There are two types of risky investors, “Those who don’t know, and those who don’t know they don’t know.”
One should always re-evaluate their portfolio as one income, tolerance, need and preferences always change concurrently. You might earn more this month compared to the previous or you might need additional money this year compared to last year. All of these factors should be reflected in your portfolio structure.
Risk is an important part of investing, but getting the wrong idea about it can mess up how we structure our portfolios.
You should always diversify your assets. You should have a range of assets in your portfolio that all react differently to what’s happening in the world. The best investor will plan for every turn and turf that might happen. For example, during the pandemic outbreak, almost every asset crashed. Thus, investing in commodities that are able to combat market crashes like gold will be a safe bet.
History tells us that stocks, bonds, real estate, and commodities all perform differently because the external forces on them are different. Simply said, a mixture of different asset types won’t hurt your whole portfolio if that risk is spread out.
Always equips yourself with ample research before making any trade moves. Avoid those 3 common mistakes, build your financial knowledge and be in a better position to grow your wealth.
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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance