Avoid These Pitfalls at All Costs
I’m sure you’ve heard this time and time again — remove emotion from investing and you’ll be better off.
The problem is that eliminating emotion is hard when it’s your own money on the line.
Investors often experience a roller coaster of emotion, which was described by Westcore Funds/Denver Investment Advisors LLC in 1998…
Source: Westcore Funds/Denver Investment Advisors LLC in 1998/PalisadesHudson.com
When a stock skyrockets, you want to get in on the hype. And on the other hand, when one of your positions falls, it’s hard to sell it for fear that it might bounce back.
This mentality, along with several other pitfalls, makes it hard for you to be the best investor you can.
That’s why today I’m going to address some of these pitfalls and what you can do to avoid them.
1. Don’t Trade Only What’s Familiar
People have a tendency to remain in their comfort zone. Likewise with investing they’ll trade what’s familiar to them. The problem when you invest this way is you limit diversification in your portfolio.
According to the SEC’s report on behavioral patterns and pitfalls of U.S. investors, an investor should hold at least 300 stocks.
Contrary to this, the average investor actually holds only three or four positions.
This lack of diversification makes a portfolio riskier if a company or sector collapses.
Instead, diversify your portfolio with a healthy mix of stocks that gives exposure across the whole of the market.
2. Cut Your Losers, Keep Your Winners
People have a tendency to hold onto losers much longer than they should.
They might do this for a slew of reasons: Wanting to wait until the stock returns to their purchase price, keeping hope alive that their initial hunch was well-founded or even just not wanting to cut out one bad stock out of a portfolio of dozens and dozens of good ones.
Whatever the case, it goes against the old Wall Street adage “Cut your losses short and let your winners run.”
This rule exists because it works. And when you invest in proven high-quality dividend-paying companies, you’re nearly guaranteed to see your portfolio shine.
Make it more spectacular. Get rid of the duds that are holding it down.
3. Beware the Hot Streak
There are plenty of times a stock is overbought. And yet investors still jump on the hype.
Take Tilray Inc. (NASDAQ: TLRY) — a Canadian pharmaceutical and cannabis company — for example…
On Aug. 13, 2018, the stock opened at $26.
And fueled by the much-hyped marijuana legalization trend that was taking hold, buyers jumped in.
Day after day, we saw the market pour money into TLRY. Share prices rose by double digits almost daily for weeks in a row…
When it finally hit $300, the bubble burst and sellers took hold of the stock.
And if you bought into the hype too late or didn’t cut the stock loose fast enough, you were out of luck — and out a lot of money.
With these in mind, you’ll be well on your way to knowing when to stay active in the markets and when to hold back.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch