If you are one of the many investors following each and every newsbyte with your utmost focus with the aim of making better investment decisions, you may be heading down the path of a common investment pitfall – paying too much attention to the news. Here are 3 common investment pitfalls which investors should avoid.
Pitfall 1: Being overly-focused on the news
While it is certainly a good thing to be passionate about your investments, being overly-focused on the news may be detrimental to your investments. As an old investment adage warns, “If it’s in the news, it’s in the price”, and investors who react to daily happenings in their investments will certainly find themselves behind the curve in identifying the right investment opportunities.
In addition, the media tends to report what “feels” right at the moment to relate better to readers, which leads to more bearish views being aired when financial markets are doing poorly, while bullish views are the order of the day when markets are doing well. Investors who correlate their emotions with what they read are likely to invest more when markets are bullish, and sell more when markets are bearish, which may go against the logical approach of “buy-low, sell-high”.
We feel that investors should spend less time worrying about things in the news, but instead be focused on their own investment objectives and needs, parameters which are well within their own control. By considering these parameters alongside one’s investment risk appetite, a suitable allocation between bonds and equities may be determined to meet those financial goals, and the plan implemented in a disciplined manner.
pitfall 2: trying to time the market
While there are investors who can successfully trade the market on a daily basis, the majority of investors are not well-equipped with the tools, technology or time to do so. Nevertheless, this has not stopped many from trying to time the market, in the belief that one can enter or exit the market at the “perfect” time, thus making returns which are superior to that of the stock market.
Academic research has shown that most who try to time the market fail to do so consistently, leading to sub-par returns on their investments. A disciplined approach to investing will lead to a more successful investment, which entails staying invested and accepting the market’s returns (which has historically provided decent returns for investors over the long term), rather than trying to trade in and out of the market, which can mean missing out on some of the stock market’s strongest periods of returns.
pitfall 3: not knowing enough about what you buy
While another common investment adage speaks of “buying only what you know”, many investors have a problem with not knowing enough about financial products before investing in them. The financial market crash of 2008-2009 saw mom-and-pop investors lose their entire life savings as complex structured products they invested in lost substantial amounts of their value.
While investors believed they were buying fixed deposit equivalent investments, many of these products were actually structured such that the investor was exposed to the credit risk of both the product structurer, as well as all the underlying “reference” companies. Often, all it took was for one of the underlying “reference” companies to experience a “credit event” before the investment lost all of its value.