This is in continuation of our previous article – How To Create Investment Portfolio For The Long Run? We had discussed the techniques to create our investment portfolios in the long run. But most investors fail to manage their portfolios for various reasons. We would like to explore the most common reasons in this article.
Topics we’ll be discussing:
- Most investors focus on the short term
- Lack of proper investments strategy
- Our psychology is to blame for our poor investment choices
1. Most investors focus on the short term
We all want our returns quickly. We all want to earn money as soon as possible. We all want to find a get-rich-quick scheme.
Having so many distractions, it’s no wonder that most investors fail to manage their investment portfolios. You could overcome one distraction, but then another one pops up.
If you have ever been in a diet, then you might know how it works. You start working out a lot. You start eating healthy foods. You overcome the temptation of chocolates. But then one day, you see a delicious cheesecake in your fridge. After all the hard works you have done, you give in to that cheesecake. Your surroundings controlled you.
In investments, it’s all too similar. While we are all set with planning for the long term, we fail to focus on the short term. Even a small inaccuracy can lead to a major catastrophe in your investment returns.
Don’t worry if you are also one of the “short-term thinkers”. Most investors fall under that category. The good side is that if you are able to overcome that thinking, then you’ll be a very successful investor. There’s so little competition for the “long-term thinkers” that the few ones that actually invest in the long term are able to generate the highest returns.
Word to remember – You might win the battle by focusing on the short term, but you will always win the war if you focus on the long term.
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”Warren Buffet
2. Lack of proper investments strategy
It’s often said that if you fail to plan, then you are planning to fail.
A proper investment strategy is one of the first steps that you should get into before investing. You must have answers to all the questions related to your investment portfolio.
I have listed out a few investment questions that you should consider before creating your investment strategy. Choose the ones that apply to you.
Basic investment questions to ask yourself
Purpose: What’s your purpose for investing? Is it to gain financial security in the future? Do you want to buy a car or a home with that money?
Time period: How long are you planning to invest for? 10 years? 20 years?
Risk tolerance: How much risk can you hold? Would you be able to withstand your portfolio falling down by more than 20%? Will you panic, or can you control your emotions effectively?
Return expectations: How much return are you expecting to get from your investments? Why do you think that you will be able to achieve that return? Most investors make mistakes in this part. They expect to get more returns than everyone else. While it’s theoretically possible to outlast every other investor, but it’s extremely difficult to achieve practically.
Your core competence: Do you know a particular investment field more than other people do? Let’s say you are a tech guy. So you will be knowing more about technology than most investors. You should try to focus more on technology investments as that’s where your core competency lies.
My personal failure in devising an investment strategy
When I was starting out my investment journey, like most people, I got too excited. I was so impatient to buy the first stock that I had forgotten to create an investment strategy. So I lost more than 30% in my first investment…
Since my horrible first experience, I have devised a solid investment strategy that is helping me focus on long term investing. If you haven’t yet started investing, then I would highly encourage you to establish a proper strategy. You won’t regret it!
“You need a strategy, and an investment decision can be evaluated only in the context of that strategy. “Aaron Brown
3. Our psychology is to blame for our poor investment choices
Psychology has played a big part in us. While most it has worked in our favor, there are some that have been detrimental for us. In investing as well, it’s the same scenario
We are prone to make bad investment decisions because of the psychological traps. The worst part is that most of us don’t even realize our mistakes until it’s too late…
This is arguably the most common psychological bias we face while investing. We assume that we can earn an unrealistic high return from our investments. Our overconfidence is most likely to lead us into our pitfall.
A less discussed but equally negative effect of overconfidence is that it leads us to excessive trading. When we believe that the market will go up next month, then why not buy as many shares today, and sell it in the next month?
Investing = Long time horizon
Trading = Short time horizon
With overconfidence, our investing turns into trading. Initially, our plan might have been to invest in stocks for 10 years. Now, it has turned into trading within a month.
Please don’t turn investing into a game of trading.
Like overconfidence, there are plenty of other psychological traps, which you should avoid at all costs. I had written about the 5 most common investment psychological traps, so please feel free to check it out.
I think investment psychology is by far the more important element, followed by risk control, with the least important consideration being the question of where you buy and sell.Tom Basso
Despite being all set to invest for the long term, most of us fail to manage our investment portfolios. A lot of us are short-term thinkers, which directly contradicts with our long term investment goals. Likewise, we fail to create a proper investing strategy, leading to our psychological mistakes.