Investors have a number of weaknesses which often result in investment failure. Identifying these weaknesses is the first step to reducing them. The following are 5 key reasons why investors
Money is important to our survival, social status and way of life and therefore dealing with finances is an emotional subject.
As a result emotions tend to have exceptionally negative consequences on our investment decision making. When our investments are doing well, we tend to add to our positions or hold on to our investments too long. Alternatively, when our investments are doing poorly we tend to sell our positions in fear of losing money. This type of reaction is not healthy for making successful investments. Emotional investment decisions tend to cause the investor to buy high and sell low.
Obviously this is not the best strategy.Solution:
Learn to control your emotions.
In the bull market everyone gets along and agree on the current hot market. However, few investors buy when a market is unpopular and not doing well, but history suggests these are usually the ones who succeed with their investment strategies. These are the investors who see value in unpopular investments and buy when they are on sale. In reality we can not all make money. Someone must lose if others are to gain. History repeatedly demonstrates that it is the popular group belief that generally takes the loss.
Solution: Do not always follow the herd.
Some investors do handle their emotions while investing, but they lack an investment strategy, thus falling victim to the same problem. It is hard to resist the temptation to hold onto a winning investment. People gamble and want to hold onto that investment a little longer than advisable. Contrarily, if an investor has experienced previous losses, it is hard to resist selling an investment to lock in the profits. However when they do, they are often disappointed with the modest gain when that same investment continues to rise. Experts say, discipline is one of the toughest skill to master in the world of investing.
Solution: Methodically approaching your investment strategy with a predetermined plan and system makes disciplined investing easier.
People are taught to study and work hard to get a good job and make money. But they are not taught what to do with the money after it has been made. Ignorant people tend to believe they will outperform the market with little to no strategy. Even worse, ignorant investors commonly implement widely accepted yet faulty strategies that greatly reduce their probability of success.
Solution: Understanding basic rules and having a predetermined system helps investors remain focused and be on the right side of the trade.
Networks and various media often discuss current financial trends. Alot of false information is spread out to the gullible investors. This media hype about raising/dropping targets makes us question our investments, which eventually leads to selling early or buying too late. Such misinformation causes most of us to lose focus on the big picture.
Solution: Understanding the fundamental & technical aspects help bypass misinformation.
Conclusion: Investors at all levels struggle with the common 5 problems listed above. Knowing natural weaknesses can only make an investor stronger and focused on the long term goal.