Over the years, all investors make mistakes. Even the greats such as Warren Buffett and Neil Woodford have bought shares that have been sold at a loss, while they’ve also passed up what proved to be golden opportunities to generate fabulous returns.
One mistake a lot of new investors make is having a short-term outlook on their holdings. Certainly it’s possible to make a lot of money very quickly on shares, but the chances of someone doing so who has modest experience are relatively slim. Still, many beginners seek to buy, to hold for just days or weeks, and then sell at a profit. While doing so is possible during favourable market conditions, repeating the trick many times is a much bigger challenge.
Similarly, buying only a few shares within a portfolio is another common error. All investors have probably done it at some point: a few companies seem to be dead certs and so you pile-in with the aim of making a fortune. However, any company in any industry can have a profit warning, lose a major customer or disappoint in a thousand other ways to leave an investor who’s not diversified in a hugely lossmaking position.
Furthermore, it’s too easy to become obsessed with news flow as an investor. There’s so much data and information available nowadays for free that it’s possible to study companies, the economy and anything else financial 24/7. While this may hold some appeal for commentators, for investors the reality is that over-analysis can lead to paralysis and the inability to make clear decisions on which stocks to buy, sell or hold. Even the best investors have sometimes allowed themselves to be dictated to by the market rather than their own judgment.
Of course, investors make mistakes throughout their investing life and even if you’ve made all of the mistakes above and are nearing retirement, it’s never too late to change tack and adopt a different strategy.
Play the long game
One strategy that has historically worked well is to think about the long term rather than the short term. Some people may say investing in shares is akin to gambling, but the reality is that shares are tiny pieces of a real business, and the business world moves incredibly slowly – especially big businesses. Therefore, it can take a long time for an investment to come good, which means a long-term strategy can prove to be the most profitable.
Similarly, buying when shares offer good value for money, no matter what the economic outlook, tends to deliver higher capital gains in the long run. At the moment there’s a lot of uncertainty and many investors are staying away from shares. Certainly, prices may fall further, but if an asset has an appealing risk/reward ratio then it’s more likely to deliver appealing gains rather than major losses.
Furthermore, by holding a mix of companies in different sectors and that operate in different parts of the world, it’s possible to reduce company-specific risk and obtain a portfolio that’s more stable and resilient. By doing so and thinking long term, as well as focusing on company fundamentals rather than short-term news flow, you may become a little more Foolish than most investors. And that can start you on a path towards achieving your long-term financial goals.
