When the financial markets experience volatility and the economy tightens, as it is today, many people point to these circumstances as the reasons their investment plans are failing. But the reality is that volatility is a natural occurrence. History has shown that financial markets and the economy move in cycles.
So, if these market cycles are to be expected, why do many investors still struggle? Following are some of the most common reasons and suggestions on how to avoid these pitfalls.
?No clear goals for the portfolio. As with many aspects in life, having a clear goal creates a clear direction and improves the odds of success. What are the goals of the investment portfolio?? ?To make money? is rarely a true (or effective) goal of any portfolio. Goals should delve deeper and be more specific. Examples might be to retire maintaining the lifestyle one has become accustomed to (or to improve it), to pay for a child?s education, or to support parents during their golden years, to name a few.
Concentrating on return; ignoring risk. Too often, investors concentrate on possible returns without realizing what risk is needed to obtain that return. There are many opportunities for large payoffs that require you to risk losing everything. Most investment opportunities are not that dramatic, but investors should understand what risk they are taking (and are comfortable taking) prior to making any investment.
No rebalance/sell discipline. Many investors take the time to research particular investments before making the decision to buy. But few conduct the same due diligence to learn what circumstances would necessitate increasing or decreasing the size of that investment within their overall portfolio. Knowing when to adjust ? or rebalance ? one?s portfolio by selling particular investments is a crucial component of any successful investment strategy.
Lack of diversification.? A portfolio invested primarily in one market sector runs the risk of that sector failing, but also stands to gain from any upside of that sector. For most investors, the potential downside risk carries more weight than the potential upside return. A diversified portfolio should include investments across many market segments and sectors to help balance risk and reward. A few areas of diversification that may be overlooked are foreign exposure and small capitalization exposure (both domestic and foreign).
Buying ?products? rather than solutions. Investors are constantly offered investment products. Although products are necessary, they should be the final piece of the equation, not the first. Rather than start with a product, look at the end goal. Review the various solutions available to you and decide which product(s) is the best tool for the desired solution.
Taking too much (or too little) risk. Some investors take too much risk, in hope of a windfall. Others are more worried about losing what they have than they are interested in getting more. Understanding how much risk an investor can or should take is an important key to the overall success of the investment plan.
Risk is a difficult concept to measure, of course. It can be measured by academic formulas, which have both benefits and drawbacks. Risk can also be measured by ?comfort? of the investor with the portfolio. A combination of both measurements may be the best solution. Once goals have been set, risk can be measured as a probability of meeting the desired goals.? If the goals can be met with a ?less risky? portfolio, that may be a viable solution. On the other hand, there may be times when an investor needs to take more risk to increase the probability of meeting the desired goals. In such cases, if an investor is not comfortable with that level of risk, it may be necessary to modify the goals.
Thinking short term. Risk is directly related to the investor?s time horizon. Market returns are not linear; they ebb and flow with short-term economic cycles. Historically, investing in the financial markets has provided superior results when investments are made and maintained for the long term.
Making emotional decisions. Typically, investors are fearful of putting their money into bear markets when there is often good value to be gained over the long term. Conversely, investors often become greedy and invest too heavily during rising markets when the true growth potential is slowing and coming to a close. An example of this is the tech bubble of the late 1990s that not only pulled a lot of investors in too late in hopes of getting extraordinary returns, but also made them nervous and kept them out of the stock market after the detrimental burst when other equities were taking off. Simply put, emotions can get the best of investors and keep them from achieving the full potential of the stock market in the long-term.
There is no plan. Perhaps the most common reason why investment plans fail is that the investor doesn?t actually have a plan. All of the points previously outlined in this article will factor into developing an investment plan. Once you?ve developed a plan, put it in writing.? Review the document and portfolio on a regular basis (quarterly or annually, not daily) and make changes as needed. The old adage ?people do not plan to fail, they fail to plan? is never more true than in creating and maintaining a portfolio.
Going it alone. Keeping track of all these key issues is a big job, and most investors don?t have the time or education to do it alone. Working with a trusted advisor to create and maintain an investment plan will help ensure success in the long term. Competent investment advisors work with clients to determine their personal and financial goals, needs and priorities; understand their time frame for achieving results; and discuss their tolerance for financial risk. Having a comprehensive knowledge of diverse financial issues ? such as taxes, investments, retirement planning, estate planning and insurance ? enable advisors to help clients understand long-term planning and the big picture. Above all, an advisor must take seriously his fiduciary responsibility to always place the client?s best interest as his highest priority.
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Source: http://www.figuide.com/its-not-the-economy-heres-why-your-investments-are-failing.html
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