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Investors’ Common Mistakes and How to Avoid Them

If you did not inherit wealth from your family and want to become richer, you need to invest. For those who have never thought of investing and wondering what this action involves, a brief definition of investment might be helpful. In dictionaries, an investment is defined as an item or an asset bought to generate income or appreciation. The verb “generate” in this definition is telling: you buy something not to use today but to keep it for the future to create wealth. When you invest in an item or asset, you hope that it will provide income in the future or that you will sell it at a higher price and make a handsome profit. That is, investing guarantees that, if you learn how to invest money properly, you will become richer than you are today.

You might object, of course, that investing is risky and that, according to the latest statistics, whopping ninety percent of people lose money when investing in the stock market. These numbers might be correct, but these people invest unthinkingly and make all-too-common costly mistakes for obvious reasons. For one thing, people often feel lazy to conduct laborious research on assets, companies, or the stock market. They prefer to listen to various recommendations that they find online or chatrooms, which are, unfortunately, often incorrect or biased, being given by stocks or funds’ owners themselves. For another, people are often impatient, eager to earn money fast. Instead of focusing on their long-term investment goals, they make risky investments with the hope of hitting the jackpot and lose as a result.

Financial Advisor

Another mistake that investors make is not diversifying. That is, they allocate their capital in one particular asset or risk. Investors are consistently warned not to “put all eggs in one basket,” as the saying goes, but still stick to their favorite assets and run the risk of losing all money. The right strategy of any investor should be diversification: by creating a diverse investment portfolio, they can forearm themselves against stock market corrections, difficult economic times, or a bear market. If you want to play it safe, mix in funds such as stocks, bonds, cash, real estate, commodities, and REITs.

The biggest enemy of smart, profitable investing is human emotions. Investors often lose their cool and make investing decisions at the spur of the moment. Most forcefully, people become influenced by their emotions when the stock market reaches its peak or tumbles. Radical movements in the stock market create panic among investors, so they stop reasoning and make investment mistakes. Some people even rely on their gut feelings and  instead of listening to the voice of reason or making accurate calculations when managing their assets. Other investors become emotionally invested in a specific company because they admire their products or worked there in the past. Far from closely following the changing price of the company’s stocks, they continue investing in it, even when its assets begin to lose their value. Rooting for a sinking company out of sentimental attachment or loyalty is a sure way to go down with it, however noble such support might look from the ethical point of view.

Investors also often forget about fees, which significantly reduces their profits. When choosing a broker, they tend to take the question of fees lightly, even though some brokers have high and also hidden fees. It is of paramount importance, therefore, to remember that there are fees involved with buying funds or making stock trades or purchases. And no fee, however small it looks, is insignificant. A fee of 1 or 2 percent might cut a large slice off your profit.

It is understandable that to avoid making all these mistakes mentioned above is difficult, especially for people who are just finding their bearings at the stock market. If you are a novice investor, it might make sense for you to start investing first with a robo-advisor, an investment platform that advises people on how to make investments with the help of technology. Using this software is simple. To activate it, you need only to fill out your details, state your financial goals, and indicate your risk tolerance. After you have submitted this information, the robo-advisor will create an investment portfolio for you, ensuring that it is diversified and does not wander off the defined trajectory. It will then manage your portfolio on your behalf with the help of sophisticated algorithms, rebalancing it, when needed. Another essential function that the robo-advisor will perform is tax harvesting. That is, the software will sell unprofitable securities and will replace them with similar securities and, in so doing, will maintain the best asset allocation and expected returns.

Most importantly still, the robo-advisor will shield you from making all the common mistakes that often undermine investors’ profits. It will conduct painstaking research on the stock market, will attain your long-term financial goals, and will never be swayed by emotions. After you have learned how to invest from the technology, you will be ready to launch out into the deep of the stock market on your own.

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