If you want to become wealthy, you will have to invest in stocks at some point.
You won’t be able to avoid it.
The stock market is a great wealth building vehicle.
But you have to avoid the big mistakes.
It’s actually more important to avoid the mistakes than picking the right stocks.
Here are the 5 biggest investing mistakes that most people make.
Not Knowing Your Risk Tolerance
This is a huge blind spot for investors.
Most of the time you think you are more risk tolerant than you really are.
So you take on more risk in your portfolio.
But at the first sign of trouble you sell.
This is a big problem.
You just bought high and sold low.
That’s not good.
So be true to yourself.
If you can’t tolerant swings in the market, buy more conservative assets and sleep better at night.
Panic Buying or Selling
Have you ever jumped in or out of the market because of a big move?
I hope you said no.
It’s not a good idea.
Knee-jerk reactions never are.
But if I had to choose which is worse, I would choose panic selling.
If you are playing the long-game, just ride out the short-term volatility.
Stocks are the only thing that makes us panic when the price goes down.
If Target puts clothes on sale, you just buy more clothes you don’t get rid of the clothes you have.
Doing Too Much
I have an obsessive personality.
You might too.
I want to constantly tweak my portfolio to make it better.
Except it doesn’t make it better.
It makes it worse.
The minute you dump the funds that aren’t currently performing well, they start performing.
So fight the urge to tweak.
Lack of Diversification
Owning 3 different S&P 500 index funds in your portfolio is not diversification.
S&P 500 index funds are great but you should diversify.
Buying funds in different asset classes is diversification.
For example, owning a S&P 500 index fund, a bond index fund and a commodity index fund is diversification.
That’s not a recommendation. That’s an example.
If you’re looking for more information on diversification, Modest Money has a great article titled Investment Diversification: 5 Risky Mistakes to Avoid.
Not Rebalancing Your Portfolio
This one isn’t well known but it’s really important.
According to The Investment Answer by Daniel Goldie and Gordon Murray, rebalancing your portfolio will mean the difference a 9% return and a 8% return.
That’s a huge difference over 20 to 30 years.
What is rebalancing?
I’ll show you with an example.
Let’s say you want a portfolio of 50% stocks and 50% bonds.
After one year, your portfolio is 60% stocks and 40% bonds because stocks did better than bonds this past year.
To rebalance, you sell 10% stocks and buy 10% bonds.
You systematically sell high and buy low.
You will invest in the stock market at some point in your life.
So you need to understand the pot holes to avoid.
It will make your experience much easier in the long run.
And avoiding these mistakes will put you well ahead of your peers.
Can you think of any other stock market investment mistakes you need to avoid?
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