Investing for the long term involves creating a well-diversified portfolio to provide you with the appropriate levels of risk and return. But no one can predict or control what returns the market will actually provide.
It is important not to expect too much. No one can tell you what a reasonable rate of return is without having an understanding of your goals, and your current asset allocation.
No Clear Investment Goals
Many investors focus on the latest investment trends or on maximizing short-term investment returns instead of creating an investment portfolio that has a high probability of achieving their long-term investment objectives.
Investment plans, strategies, the portfolio, and even individual securities can be configured with your life objectives in mind.
The best way to create a portfolio that has the potential to provide appropriate levels of risk and return in various market scenarios is by having enough diversification.
Too much diversification and too many exposures can also affect performance. The best course of action is to find a balance.
While professional investors may be able to generate excess return over a benchmark by investing in a few concentrated positions, common investors should not try this. It is wise to consider diversification.
When building an exchange traded fund (ETF) or mutual fund portfolio, it's important to allocate exposure to all major sectors.
For an individual stock portfolio, include all major sectors. Do not allocate more than 5% to 10% to any single investment.
Lack of Focus on Performance
If you are a long-term investor, speculating on performance in the short term can be a recipe for
disaster because it can make you second guess your strategy and motivate short-term portfolio modifications.
Look past short term gains to the factors that drive long-term performance and if you find yourself looking short term, refocus.
Buying High and Selling Low
The fundamental principle of investing is to buy low and sell high. Many investment decisions are motivated by fear or greed.
Most investors buy high in an attempt to maximize short-term returns instead of trying to achieve long-term investment goals.
A focus on short-term returns leads to investing in the latest investment craze or investing in the assets or investment strategies that were effective in the past.
Once an investment has become popular, it becomes more difficult to have an edge in determining its true value.
When investing, patience is a virtue. It takes time to gain the ultimate benefits of an investment and asset allocation strategy.
Continuous modification of investment tactics and portfolio composition can reduce returns through greater transaction fees, and can also result in taking unanticipated and uncompensated risks.
You should always be sure you are on track. A slow and steady approach to portfolio growth will yield greater returns in the long run.
Expecting a portfolio to do something other than what it is designed to do is a recipe for disaster. You need to keep your expectations realistic with regard to the timeline for portfolio growth and investment returns.
Paying Excessive Fees and Commissions
Investing in a high-cost fund or paying too much in advisory fees is a common mistake. Even a small increase in fees can have a significant effect on wealth over the long term.
Before you open an investment account, be aware of the potential cost of every investment decision. Look for funds that have fees that make sense and make sure you are receiving value for the fees you are paying.
Making investment decisions on the basis of potential tax consequences is still a common investor mistake. You should be smart about taxes.
Tax loss harvesting can improve your returns significantly but it is important that the drive to buy or sell a security is driven by its merits, not the tax consequences.
Not reviewing investments regularly
If you are invested in a diversified portfolio, there is a chance that some things will go up while others go down.
At the end of a quarter or a year, the portfolio you built with careful planning will start to look quite different.
Check in regularly (maybe a minimum once a year) to make sure that your investments still make sense for your situation and that your portfolio doesn’t need rebalancing.
Investing in the Wrong Type of Risk
Investing involves taking some level of risk in exchange for potential reward. Taking too much risk can lead to large variations in investment performance. Taking less risk can result in returns too low to achieve your financial goals.
Make sure that you know your financial and ability to take risks and recognize the investment risks you are taking. Turnover, or jumping in and out of positions, is another return killer.
Unless you're an institutional investor with the benefit of low commission rates, the transaction costs can negatively affect your investments.
Lack of Knowledge on the True Performance of Your Investments
Many people have no idea how their investments have performed. Even if they know the headline result or how a couple of their stocks have done, they rarely know how they have performed in the context of their portfolio.
You have to relate the performance of your overall portfolio to your plan to see if you are on track after accounting for costs and inflation.
Getting even is just another way to ensure you lose any profit you might have accumulated. It means that you are waiting to sell a loser until it gets back to its original cost basis.
By failing to realize a loss, investors are actually losing in two ways. They avoid selling a loser, which may continue to slide until it's worthless. Second, there's the opportunity cost of the better use of your invested money.
Falling in Love With a Company
When we see a company we've invested in do well, it's easy to fall in love with it and forget that we bought the stock as an investment.
Always remember, you bought this stock to make money. If any of the fundamentals that drove you to buy into the company change, consider selling the stock.