If you’re like most stock market investors, you’re a confident investor. You know the fundamental and technical indicators that lead to growing stock prices or growing dividends. You’re even comfortable predicting when a company will under or overperform expectations and the market as a whole. But even confident, knowledgeable investors fall into investment traps that keep them from achieving their best returns (adjusted for risk). These are three common traps that DIY investors fall into.
Even investors who actively manage their portfolio need to keep portfolio fundamentals in mind. It’s easy to get overweighted in a single stock, a single sector, or a single asset type. However, overweighting leads to a much a greater chance of wipeout risk. If you’ve done your research, and you feel confident in an investment, you should allocate some of your portfolio to that investment. But every investor needs strategic hedges. You need to know when to buy and when to sell.
Individual stock holders have an especially high risk of becoming dangerously overweighted in a single stock. Investors at the greatest risk are those who purchase massive holdings through employee stock purchase plans, or those who receive stocks as bonuses. If you’re heavily tilted towards one stock, consider ways to weight your portfolio to offset your risk. This could include purchasing options, or investing heavily outside of your sector.
Trading… When you feel like it
Another common investment trap is to actively trade… sometimes. Maybe you’ve read a book about investing strategy, or read a newspaper article about one of your stocks. Afterwards, you get excited about your investments. You actively trade for a week or two. You even check stock prices during your lunch hour. Then, a few weeks later, you can’t even be bothered to check your performance relative to the market.
Successful investors don’t follow their strategy when they feel like it. They follow it all the time. Come up with an investment style that fits your schedule, your abilities, and your risk tolerance.
Not following your rules
At DIY.Fund we’re investing style agnostic. We allow you to investigate technical and fundamental indicators, so that you can manage your investments in a way that fits your strategy. But you have to manage your investments. You have to follow your own rules.
It’s hard to control your emotions. It’s hard to cut your losses and move on. A disciplined, rule-based investment strategy makes it easier to control your emotions. Knowing the details makes it easier to convince your brain of the right action. Still, convincing your heart isn’t always as easy. But allowing your emotions to overrule your rules tends to be a big investment mistake.
Avoid the traps and invest with confidence
Individual stock holders can avoid wipeout risk by executing an overall portfolio strategy. You can invest with confidence when you give yourself the information and motivation you need to avoid the investment traps.