Investing is a process and, if done correctly, it can provide for some of your biggest financial expenses, such as a college education for your kids or for your retirement. The benefit of this process is that most investment mistakes won’t destroy you if you invest correctly; you have the time to make up for whatever losses you might incur. But bad investment habits can destroy you, because those make investment mistakes routine instead of rare occurrences. Here are the three worst investment habits.
Overreacting to the Market
While the goal is to “buy low and sell high,” it’s harder to do this than it sounds. On a daily basis, the stock market can sustain huge dips or epic gains, all of which can convince some investors that they have to do something because they don’t want to “miss out.” All this behavior does is ensure that the investor buys high and sells low. The fix for this bad habit is to simply do nothing based on daily fluctuations. Money in investments should grow over long periods of time, so in most instances the best thing you can do is leave your money where it is regardless of what the market is doing.
A lot of investors focus on “stocks” when they think of investments, but there are not only a variety of stocks to choose from but a variety of different investments you can have, such as bonds and mutual funds. Each investment has a different risk profile; shifts in the economy can make each rise or fall in value. So if you have the majority of your resources in one type of investment, you are taking a huge risk because if one element of the economy shifts you could lose the bulk of your investment. The best thing you can do is distribute your money to a variety of different investments that are susceptible to different risks. This way, if something happens that causes one of your investments to decline, only part of your money is at risk while the rest of your investments can make up for whatever losses you might sustain.
Lack of Liquidity
When investing, you have to figure out how much cash you need on hand. While it might be attractive to invest as much money as possible to get the biggest return, we are all susceptible to unexpected expenses that require immediate cash. If you do not have enough cash in your checking account, selling off your investments could cost you in terms of higher taxes and penalties. The best way to combat this is to budget and provide yourself with enough of a “rainy day” fund to ensure that if any unexpected expenses do occur, you can cover it with cash you have on hand.