2022 drags on to be relentlessly grueling for investors. Particularly retail investors whose portfolios are down more than 40% this year and more than 18% over the last 3 years, as shown below.
Estimated Performance of Retail Investors from Jan 2020 – Oct 2022
The vox populi does not have experience managing money and investing in the stock markets. But even a complete greenhorn can know the ropes of the stock market with a dash of financial acumen.
Any investor looking to make their mark on Wall Street must recognize and rectify these typical mistakes.
1. Sourcing Investment Advice
Expert guidelines for financial consultation are crystal clear: It is moot to take investment advice from people unaware of your financial situation. For example, someone on social media might brainwash you to invest in a particular company. Stop. Are they even mindful of other investment alternatives available to you? No.
Always take financial advice from someone well-acquainted with your risk appetite and investment goals.
2. Getting Caught Up in the Hype
Say there is a word in the market about a hot new stock or IPO; it is easy to fall down that rabbit hole. However, just because everyone is buying it doesn’t mean you should too. Step back, and ponder the reasons for this investment. Ask yourself the following questions: Do you concur with the company’s ideology? Is the business model intelligible? Are you comfortable with the risks involved? Does this company improve your portfolio optimality? If not, it’s best to steer clear.
3. Failing to Diversify Your Portfolio
Negligence to portfolio diversification can become a grave miscalculation on an investor’s part. Excessive focus on individual stocks and sectors might make your portfolio vulnerable to higher risks and endangered to monetary loss.
Therefore, diversify your portfolio with at least 15 stocks having either low or no correlation spread across multiple sectors. Be alert to the scenario where a particular stock accounts for more than 10% of your portfolio allocation.
4. Taking extreme, exiguous, or erroneous risk
Investing is all about finding a proper balance of risks and rewards. Even a well-diversified portfolio can cause significant variations in investment performance if substantial high-risk stocks are present in the mix. Conversely, lower risks can result in low returns, insufficient to fulfill your financial goals.
Investors need to recognize their financial and emotional capacity to identify the degree of risks they can withstand. Track your portfolio risk with financing measures such as beta and standard deviation. The Sharpe ratio sets a suitable benchmark to show if a risk is worth the return.
5. Delaying investing altogether
Lastly, withholding yourself from investing can turn into a costly mistake. Preserving all your cash in a bank account means losing its purchasing power to exorbitant inflation rates.
Being intimidated by investing means missing out on a favorable compounding return effect that generally happens over the long term.
Conclusion:
Investing in the stock market can raise the trajectory of your wealth over time. Though, it accompanies potential risk. Recent technological advances in active management approaches can become a solution to fix these five mistakes and create portfolios tailored to their distinguished needs.
So bide your time, take control of your finances, and become a champion investor!
