While many people find that they become better investors as they become more experienced, nobody is ever perfect. Even Warren Buffet, one of the most successful investors of all time, makes mistakes from time to time. Therefore, it is natural for all investors to have flaws which could hold back their portfolio returns.
With that in mind, here are three common mistakes which more experienced investors often make. Avoiding them could lead to a more profitable future for you and your investments.
Overconfidence
With the FTSE 100 having soared to an all-time high in recent months after a stunning Bull Run, many investors are likely to be in profit. In many cases, they will have been able to generate high returns at least partly due to their own skill and judgement. For example, they may have been able to discover a number of strong performers that have beaten their respective sectors and indexes in recent years.
However, there is a danger – especially during a bull market – for investors to become overconfident. This is perhaps to be expected, since they have enjoyed a prosperous period. But it can lead to too much risk being taken, and an insufficient focus on the potential weaknesses of a particular stock. As such, reminding oneself that market conditions will eventually change could be a prudent method to overcome this particular mistake.
Overinvesting
Linked to overconfidence is the idea of overinvesting. This also usually happens after a bull market has been in existence for a period of time. It is where an investor will see the high returns that have been on offer in recent months/years and decide that they need to invest a higher proportion of their wealth in the stock market.
While this can lead to even higher returns, it also leaves an investor in a less sustainable financial position. Should markets correct as they have done in recent weeks, it can mean an investor lacks cash to buy stocks at lower prices. And should there be a real-life emergency which requires capital, an investor who is 100% invested in the stock market may lack the cash to overcome it. As such, keeping some cash on hand could be a good idea.
Over-concentration
With some sectors having performed better than others in recent years, it is understandable that some investors will have high concentrations in specific industries. They may have even added to their winning shares in the hope of generating even higher levels of profitability in the long run.
Doing so can increase portfolio risk, since a high proportion of wealth in a small number of sectors may mean there is a lack of diversity in a portfolio. This can lead to higher volatility and greater loss in the long run. Therefore, ensuring that a portfolio has exposure to a range of stocks and sectors, no matter what the outlook is for the economy, could be a shrewd move.
