I’ve worked with over a hundred clients – some with tens to hundreds of millions of dollars and some who were just starting out investing. I’ve also advised multiple individuals who had experience in the financial industry and had every belief that they knew exactly what to buy and when to buy it.
But no matter the experience, no matter the previous knowledge in finance or the amount of money the individual had – there were three main investing mistakes that would set apart one successful investor from another.
Concentration in investing is ultimately referring to the concept of putting all your eggs in one basket. That you have concentrated all your assets in one investment or minimal investments and thus have exposed yourself to additional risk.
Being too heavily concentrated means that your entire return and ultimate success of your portfolio will rely on one single investment.
That’s a big bet. And one I’m not willing to take and would argue it’s probably not one many should take either.
There are individuals that will say extreme wealth is created by way of taking big bets and being overly concentrated in a single investment or company. And for some this may be true.
Let’s use Jeff Bezos as an example. I’m sure over 75% of his net worth is tied directly to Amazon stock (or was for a long time). That is highly concentrated and has been a highly rewarding choice.
However, there have also been instances in history where over concentration has sent someone from millions to pennies in a matter of months or even days.
By diversifying your assets – and choosing to invest in multiple things across multiple sectors or industries around the world – you are effectively reducing your risk and exposure to volatility (the ups and downs).
You will still experience volatility. You are still putting your assets “at risk” in some capacity. But you are mitigating your risk because each of your investments will react differently to the same event.
Investing can take you on a little roller coaster ride of emotions. There are times that will make you feel uneasy or unsettled simply by the fact that your account may be down a bit from where it was 6 months ago – despite the fact that it may be significantly up from where you started.
It doesn’t feel good when the market is down. I’m with you. I get it.
But I do have a healthy understanding of the facts and the history of the stock market enough to understand that if I remain steadfast to my investing strategy that I will likely be rewarded by remaining patient.
You have to turn off your TVs, stop staring at your investment portfolio daily and stop getting thrilled by the ups and feeling doomed by the downs.
The markets continually move up and down. There are times it is completely warranted and other times I believe it to be an irrational reaction driven by the public. But over time – the markets have shown us they continually go up. They are resilient and bounce back from crises time and time again.
Looking back over the 20-year period from Jan. 1, 1999, to Dec. 31, 2018, if you missed the top 10 best days in the stock market, your overall return was cut in half (1).
Enough evidence to me that trying to time the market – sell at the perfect time or buy at the right time- is a fools errand.
And the last of the investing mistakes lies in the fact that some will invest far too little and others will invest far too much.
Some will defer investing or never invest at all and this can and likely will be a very costly mistake. By holding all of your assets in cash – it will continually lose it’s purchasing power due to the rising rates of inflation.
On the flip side, others will invest every last penny they have – leaving themselves in a very vulnerable position in the event they need cash fast.
It will be important to build up a solid foundation of cash in an emergency fund and also for other short term goals within the next 1-3 years.
The stock market can be volatile and there is no telling exactly when it will go up or down. So it would be devastating to put funds needed in the short term into the stock market for the stock market to go down 10% – and then you need to sell so that you can get your downpayment out. But now you have 10% less for your downpayment than you did before.
I do not see any reason to invest cash that will be needed within the next 3 years. And I also do not see many reasons to hold onto cash that isn’t needed for 30 years. It’s a balance and needs to be determined by each individual investor.
These investing mistakes can be avoided with continued financial education – stay tuned for more from FinPowered Female!
Another blog post that may be helpful to you – 5 Ways to Harness a Healthy Investing Mindset
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