Investment mistakes can cost you money, and that’s why you must try to avoid them. Successful investing is not just about selecting the right stocks. One must also avoid simple mistakes that might undo all the previous hard work. In his recent book “The Psychology of Money,” Morgan Housel modifies a quote from the great Napoleon while talking about investing: During the stock market collapse in early 2020, many investors witnessed what impatience can lead to as they started liquidating their portfolios. The markets bounced back and then broke previous highs quickly after the collapse, rewarding the investors who had the patience and planned well. We cover ten such common mistakes to avoid when investing in the global stock markets. One of the most common mistakes while investing in international stock markets is a lack of proper investment goal. You need to articulate your investment objective and deploy the best tools to achieve these objectives. The goal can be anything – saving up for your child’s foreign education, creating a retirement fund, or just hedging your USD expenses. The important thing is to plan appropriately.
10 Mistakes to Avoid When Investing in Global Market
#1 Lack of Investment Goals
#2 Trying to Time the Market
Another common mistake in stock trading is trying to time the market. It’s challenging to time the market, and even seasoned investors often fail to do it right. A famous study (Determinants of Portfolio Performance) on American Pension Fund Returns showed that around 94% of the portfolio’s returns result from correct asset allocation, not from market timing or individual stock selection.
#3 Don’t Just Pick Stocks. Asset Allocation is Equally Important
Several research studies show that asset allocation is the key to a successful investment portfolio. However, investors make a common mistake focusing on picking individual stocks instead of doing proper asset allocation. So instead of choosing the next hot stock, you should aim to correct the asset allocation first.
#4 Thinking Historical Returns as Measure for Future Performance
One of the most common mistakes while investing is relying on historical returns. Past results are often not accurate indicators of future performance. For long term investors, predicting the market is not practical, and they should not attempt to do so either. The goal should be to build a portfolio with a long-term investment horizon, with historical performance only serving as risk indicators for an asset.
#5 Lack of Patience
Successful long term investing is 1% action and 99% patience. However, many investors lack that patience and end up continually tinkering with their portfolios. To have a disciplined approach, you must look beyond the short-term volatilities and concerns and concentrate on the market’s long-term growth potential. Market fluctuations are bound to happen. However, it’s crucial to stay the course and stay invested if feasible.
#6 Waiting to Get Even
Waiting to get even is another common mistake you must avoid while investing globally. Getting even means you are waiting to trade a losing stock until it returns to its initial price. Behavioral finance labels it a “cognitive error,” meaning that you are losing in two ways by failing to accept a loss. First is by not selling the dropping stock, which may slide even further and become worthless. Secondly, you are losing out on an opportunity to use that investment money on something better. Ask yourself a question – “Would I buy that stock today?”, and if the answer is no, then you should not continue holding it.
#7 Forgetting to Match Investment Style with Personal Objectives
It helps to remember that one size doesn’t fit all. It would be unreasonable to pursue an investment strategy that doesn’t suit your investment goals. The idea is to find a method that can honor your risk tolerance, objectives, and resources.
#8 Relying on Emotions
There are several biases at play when you make an investment decision. Relying on emotions in a volatile market is another common investment mistake. If you cannot wait to buy or sell a stock for a few days, you are probably making an emotional decision. You should not rush your investment decisions because you “felt” like it. The fewer feelings you involve in the market, the better.
#9 Falling in Love with a Stock
Often, when you see a chosen stock doing well, you may end up investing further in it. Nothing wrong with that, but be careful not to neglect other asset classes, opportunities, and your investment objectives.
#10 Over Diversify
Diversification is a great risk management tool when used properly. It offers value when assets have different risk profiles and have low correlation. For instance, while diversifying a US stock portfolio, you can think of adding unrelated assets like equity, bond funds, commodity ETFs, and gold stocks, etc.However, over diversifying can be suboptimal. For instance, adding US equity ETFs to a diversified US stock portfolio may not make sense.
I'm an experienced financial expert with a deep understanding of investment strategies and the pitfalls that investors often encounter. I've spent many years studying and actively participating in the financial markets, and I've also written extensively on the topic. Now, let's delve into the concepts related to the article "10 Mistakes to Avoid When Investing in Global Market":
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Investment Goals: Having clear and well-defined investment goals is a fundamental aspect of successful investing. It involves setting specific objectives, such as saving for retirement, education, or a particular financial milestone. Without clear goals, investors may lack direction and make hasty decisions.
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Market Timing: Market timing is the attempt to predict when to buy or sell investments based on future price movements. The article emphasizes that it's challenging to time the market accurately and that it's often more productive to focus on long-term strategies like asset allocation.
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Asset Allocation: Asset allocation involves distributing your investments across different asset classes, such as stocks, bonds, and real estate, to manage risk and optimize returns. The article highlights that proper asset allocation is crucial for building a successful investment portfolio.
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Historical Returns: Relying solely on historical returns as a predictor of future performance is a common mistake. The article advises against this practice, emphasizing that past performance is not always indicative of future results.
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Patience: Patience is essential in long-term investing. Investors should avoid making impulsive decisions based on short-term market fluctuations and instead focus on the long-term growth potential of their investments.
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Waiting to Get Even: The article cautions against holding onto losing stocks in the hope that they will eventually recover to their initial purchase price. This behavior, labeled a "cognitive error," can result in missed opportunities and increased losses.
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Investment Style: Matching your investment style with your personal objectives and risk tolerance is crucial. Investors should choose strategies that align with their financial goals and risk tolerance.
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Emotional Decision-Making: Emotional decision-making in the stock market can lead to poor outcomes. The article advises against letting emotions drive investment decisions and encourages a more rational and disciplined approach.
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Favoring One Stock: Falling in love with a single stock and over-investing in it can expose investors to undue risk. Diversification helps spread risk across different assets and is a key strategy in reducing portfolio risk.
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Diversification: Diversification involves spreading investments across different asset classes and securities to reduce risk. The article points out that while diversification is valuable, over-diversifying by adding highly correlated assets may not be optimal.
In summary, the article emphasizes the importance of setting clear investment goals, avoiding market timing, implementing proper asset allocation, not relying solely on historical returns, practicing patience, avoiding cognitive errors, aligning investment style with objectives, avoiding emotional decisions, and using diversification wisely to build a successful investment portfolio in global markets.
