Investors gain an appreciation of risk and diversification in terrible markets like the end of 2018. But markets like the first half of this year can undermine those hard-won lessons.
Everywhere you look, investors face the risk of picking up bad investing habits. These often come in the form of investment rules, theories and gimmicks that pretend to take the uncertainty out of investing, and leave you with a clear path to profit.
But to succeed as an investor, you need to learn to live with uncertainty, rather than pretend it doesn’t exist. You need to avoid acting habitually. As much as possible, you want to make your investing a conscious process.
Here’s a checklist of good habits to follow and bad ones to avoid.
Good investing habits checklist
Keep these points in mind to avoid the risks of letting bad habits creep into your investing.
■ Always err on the side of prudence. Most bad investment habits involve letting your guard down. This can pay off at times; when stock prices are soaring, after all, investors who hesitate often get the feeling that they’re missing the boat. In the long run, though, it pays to under-estimate the safety and profit potential of your investments.
■ Give up on pat answers and simple formulae as guides to investing. Common sense and an appreciation of compound interest will do far more for you in the long run.
■ Investing on impulse is a bad habit that is particularly easy to acquire when stocks are rising. Instead, make a habit of first setting priorities. You have only three investment attributes to choose from—safety, income and capital appreciation potential. You won’t find all three in one investment.
■ Keep records complete and up to date. Hang on to confirmation slips and all other records of payments, transactions and so on. This ensures you’ll always have the documentation you need for tax purposes, as well as for detecting errors by banks, brokers and other financial institutions. (A good rule: When in doubt, keep it!) Then too, you should always have a clear idea of what you own and how it fits your needs.
Clues to bad investment habits
Bad habits have a way of creeping into and warping your investment thinking, without you even realizing it. In fact, bad investment habits resemble many other undesirable mental conditions; you can only begin to fight them after you acknowledge their existence. Here are clues to bad investing habits.
■ You trade heavily and accept small profits.
■ You react to drops in prices as if they were catastrophes, rather than as opportunities to buy stocks cheap. (You can pick up this habit by dabbling in low-quality stocks, where a drop in price may indeed signal catastrophe.)
■ You expect precision in your transactions—you want to buy at the bottom and sell at the top.
■ You blame others for your losses—the government, your bank or broker, anybody but yourself.
■ You believe some experts cannot possibly be wrong.
■ You’re obsessed with short-term performance and may go so far as to tally up the value of your portfolio everyday.
■ You are all too eager to sell a sound investment simply because it offers you a profit.
■ You are reluctant to sell an unsatisfactory investment at a loss.
■ You expect too much and are disappointed when your stocks don’t do well all the time.
■ You procrastinate, even when you know your portfolio needs changes.
■ You accept and act upon advice and tips without first considering whether they make sense, or are suitable for you.
This is an edited version of an article that was originally published for subscribers in the September 6, 2019, issue of The Investment Reporter . You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter .
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