7 Investing Mistakes That Can Cost You Long-Term Wealth
Key Takeaways
- Long-term investing requires patience, discipline, and a clear plan.
- Most investing mistakes come from human behavior, not a lack of knowledge.
- A diversified portfolio and a consistent investment philosophy can help you avoid emotional decisions.
- The best investors focus on what they can control and ignore the rest.
We all make mistakes. I know I’ve made my share.
For some reason, though, when it comes to investing, we’re prone to repeating them over and over. I think it’s because the “lesson” we tell ourselves we learned isn’t always the right one.
Too often, we focus on the exact circumstances of what happened and convince ourselves we won’t fall for that specific situation again.
But that doesn’t help.
The same situation rarely happens twice.
Have you ever heard the phrase, “This time it’s different?”
People who say this are often focused on the individual trees while missing the entire forest.
History never repeats, but it often rhymes.
With that in mind, let’s look at seven common investing mistakes. These mistakes affect nearly everyone, from someone managing her 401k to professionals overseeing hundreds of millions of dollars.
Why?
Because they’re rooted in human nature.
1. Looking to Get Rich Quickly
We all know someone who claims they made a fortune in the markets.
The story usually sounds simple:
- Make one big bet.
- Win big.
- Walk away.
Unfortunately, that’s rarely how investing works.
First, it’s unlikely we’ll discover the next great investment before millions of other investors do. That’s one reason the wisdom of the crowd often wins over individual predictions.
Then, even if we get lucky, another challenge appears:
When do we sell?
Once our investment succeeds, our ego often convinces us we’re smarter than everyone else. Instead of taking profits, we start looking for the next big winner.
Like someone sitting at a blackjack table at 3 a.m., we keep playing until the odds eventually catch up with us.
The stock market rewards long-term investors, which is why I generally recommend keeping any money you’ll need within the next five years out of the market and building a 5-year cash flow plan before investing.
2. Not Having a Plan
Successful investing isn’t a series of random decisions.
It’s a coordinated strategy built around your financial goals.
Money is simply a tool.
It is never the goal itself.
Before investing, ask yourself:
- What am I investing for?
- When will I need this money?
- What do I want it to accomplish?
Without a plan, it’s easy to bounce from one exciting investment idea to another.
Instead, build your financial plan first, then create an investment strategy that supports it.
3. Following the Crowd
Investors naturally gravitate toward whatever seems to be working today.
Sometimes the crowd is right.
For a while.
The problem is that trends eventually change, and the crowd rarely tells you when it has moved on.
Instead of chasing what’s working today, I’d rather invest in strategies that have consistently worked over decades.
4. Focusing on the Short Term
Many investment fads look brilliant for months or even years.
Eventually, most fade away.
If your goal is financial independence 10, 20, or 30 years from now, today’s hottest investment probably isn’t what matters most.
Keeping a diversified portfolio and staying focused on your long-term goals can help you avoid reacting to short-term market noise.
5. Spending Time on Things You Can’t Control
Have you ever checked your company stock or your portfolio several times in one day?
Maybe you weren’t planning to do anything.
You just wanted to see how it was doing.
The more we watch our investments, the more we begin to feel like we have some control over them.
We don’t.
Imagine your portfolio falls 10% today and recovers tomorrow.
If you never saw the decline, you’d likely continue with your plan.
But if you watched every minute?
Would you have been tempted to sell?
Review your investments regularly, but don’t confuse monitoring them with controlling them.
6. Taking the Market Personally
For some reason, this happens more often with men than women, but none of us should feel successful simply because the market went up.
Likewise, we shouldn’t feel like failures when it falls.
The market doesn’t know you exist.
Your success should be measured by whether your financial plan helps you live the life you want, not by what happened this week or this month.
7. Not Admitting Your Limitations
Many of us believe we’re better investors than we really are.
Remember the friend who always talks about winning trades?
They probably aren’t mentioning the losing ones.
Meanwhile, tens of thousands of investment professionals have advanced finance degrees, decades of experience, and sophisticated technology designed to outperform the market.
If they struggle to do it consistently, what makes us think we’ll do better?
Sometimes the smartest investment decision is recognizing what we don’t know.
What Gets in the Way?
The answer is simple.
We do.
Every mistake on this list comes back to human behavior.
- Fear
- Greed
- Overconfidence
- Impatience
If you invest in a properly diversified portfolio that matches your long-term goals, you’ll almost certainly experience market crashes along the way.
Several of them.
The challenge isn’t surviving the crash.
It’s avoiding the emotional decision to abandon your strategy when markets are down.
Having an investment philosophy that guides your decisions through every market cycle makes this much easier.
Build an Investment Philosophy
You can make investing much easier.
Start with an investment philosophy.
Your philosophy should guide every investment decision, regardless of what the market is doing.
From there, build an investment strategy that supports your philosophy and your financial plan.
When those three pieces work together, you’re much more likely to stay disciplined through every market cycle.
To share your comments, send me a direct email at Joe@BestFinLife.com.
Or, if you’re ready to have a conversation about improving your financial life, schedule a complimentary virtual conversation here.
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