Investors can be left to feel dizzy while designing a portfolio in the volatile stocks these days.
But the biggest mistake can be allowing the fear to prevent one from entering the stock market at all. There are some other investing misunderstandings and misconceptions which can prove to be the difference between a rocky ride and a secure future.
Recently a survey was conducted by TIAA-CREF, which highlighted two pitfalls for the investors:
When you are evaluating any investment, do not look only at the previous year performance, as about 36% of survey respondents admit doing. The thinking of about 16% respondents was even more short-term, as they simply looked at the results of the previous quarter.
The performance of the investments is not guaranteed to be the same as it was in the past, and investors must consider performance over longer periods, for example, five to ten years. But other factors need to be considered as well. A number of websites exist which provide a quick rundown of risk factor for investments, management fees and turnover amount, and top ten holdings. The more diligent you are, the more comfortable you will be about your portfolio.
Misunderstanding the risk
Having diversified portfolio, a portfolio which takes into account the age and the risk tolerance, and which mixes the foreign and U. S. bonds and equities among companies of different size, will help in reducing volatility. But risk cannot be completely eliminated, as about 71 percent of the respondents of the survey believed.
About 53 percent of the respondents believed that one had to ditch safety in order to get higher returns. The fact is that risky investments are not necessarily the ones that perform better. Over the longer period, a balanced well-designed portfolio will perform just as well as a risky portfolio, which is susceptible to the kind of highs and lows that keeps you up at night.
Pat on the back for the investors
Despite the pitfalls, there is some good news. About two thirds of the investors believe correctly that it is more important for the performance of their portfolio to allow them to reach the personal goals in life, while only one third of investors try to meet investment goals like attaining a particular percentage of return.
Roger W. Ferguson, the CEO and president of the TIAA-CREF, says that having a well-defined vision of your own financial goals is a great first step for investors. Properly allocating one’s portfolio and having a big picture in one’s mind further helps in investing for success.
Need more advice? Don’t hesitate to check out our complete guide to investing into stocks and bonds and learn how to anticipate market movements and navigate the trading field.