It’s a common cliché among investors that they are their own worst enemies. While it’s true that some investors shoot themselves in the foot by jumping on a bandwagon that’s headed for a cliff, it’s also true that many investors don’t. To use another cliche: they don’t put all their eggs in one basket.
What’s true about these clichés is that we tend to let our emotions guide us. Investment bubbles are said, for instance, to be the product of a certain kind of “euphoria” that manages to trump all caution and reason. Millions are lost and depression soon follows. Such is the nature of mania.
The question then becomes: how do we, as investors, manage these emotions that seem to guide us down blind alleys? Top investors practice the following.
They Don’t Chase Performance
Too many investors get caught up in the frenzy of recent strong performance. Take, for instance, the cryptocurrency rush. This is the most recent example. Millions of unskilled investors rushed to jump on a bandwagon that made major headlines all across the globe.
There’s nothing necessarily wrong with investing in cryptocurrencies, but rushing into the investment simply because there’s been a buzz around it is not likely to yield good results.
Here, the feeling that you’re missing out on something major (fear) is guiding the decision. But you can only know one thing for certain: you should have invested in Bitcoin when it was still under $1,000. Then when there’s a major buzz around it, sell it to someone who is themselves chasing performance.
They Execute a Master Plan
Investors that go in without a plan are playing a dangerous game. Investment is not analogous to gambling merely because both involve risk. Risk can be managed intelligently in an investment portfolio. A wise investment plan should address the following:
- Establish benchmarks. There are a number of ways to determine the success of a portfolio. All will depend on your individual investment goals. Establish a benchmark and adapt accordingly.
- Identify risks to your portfolio. You’re going to want to understand what risks are involved with your portfolio. For instance, volatility can be a risk in the short term, inflation can be a risk in the long term. Depending on what your portfolio is for, both must be accounted for.
- Establish reachable goals and objectives. Saving for a child’s college or saving for your own retirement are sound reachable goals.
- Allocate assets. You’ll want to make a decision on what percentage of your investments will be allocated to any given market. This is especially true for those planning for retirement. For example, it might make sense to invest in US equities alongside high-yield bonds, foreign stocks, or even real estate and cryptocurrencies. All of this should be designed to meet your goals while addressing risks.
- Diversify! Diversifying by investing in various asset classes is the first step. You’re also going to want to diversify within asset classes. Diversification manages potential risk while allowing you to take bigger risks with higher rewards.
The Bottom Line
Top investors successfully manage the highs and lows. They do not make choices based on emotions. They do not chase the latest trends. They are not caught up in investment frenzies. They do not become overconfident. Instead, they build a solid investment foundation from which they can take calculated risks. Interested in how solid your foundation is? Contact one of our professionals today.