Investing always comes with a certain level of risk, a certain level of gamble that you can’t avoid. But when more and more investors are coming to the realization that they are more of gambling rather than investing, there is a problem. Unfortunately, the problem affects everyone, from the big banks down to eager investors jumping at every opportunity they deem worthy. You might actually have the same problem but you just don’t realize it yet. Understanding the following signs that you are gambling and not investing should help enlighten you:
- Picking stocks. Believing that you will have access to inside knowledge or other information that nobody knows about and that you can use that information to single out stocks that will have better returns compared to the general market is rubbish. This is because individual stocks always carry more risk than what a diversified portfolio has. You are just fooling yourself if you believe otherwise. Instead of choosing from just at most 10 stocks, opt to have much more exposure with, say, thousands of global stocks.
- Timing the market. Instead of buying and holding, choose buying and re-balancing. This means that your portfolio will be mixed with debt and equities at various risk levels you wish to work with. For example, if you want to have a portfolio made up of 50% bonds and 50% stocks, posting gains from equities could give you 55% stocks instead. When this happens to you, take this as a sign that you need to fix the balance of your assets. You can achieve balance in this case by selling some of your stocks and then putting your money back into debt. Do this until you achieve the 50-50 mix you want. Keep in mind that buying low and selling high is always the aim but you also have to be smart and flexible.
- Investing in track records. Most people usually go for equity investment spreads in pools such as large multinationals or small cap growth companies. And once decided, they venture into mutual funds with boasting of the best track records in those sectors. However, the reality is that majority of active fund managers are not able to deliver returns at the market rate. The remaining minority end up without any correlations about going at it again in the future. This points out to the fact that there really is just no saying that those who have beaten the market in one year will be able to do the same as well in the next. Even if you are looking at a record of 20 or 40 years, there is no guarantee that the streak will continue in the years that concern you. It’s like you’re not betting on the horse, but the jockey, to win a horse race. You will be better off owning global index funds that cost low and offer diversified risk. You should avoid common investing mistakes and remember that returns come from markets and not individual investors.
When it comes to investing, the level of risk you take is proportional to the level of potential rewards you can reap. There is always merit in making bold moves but keep in mind that your aim is to grow your money, not spend it needlessly. Following your gut can lead to amazing results but most of the time they just leave you with the wind knocked out of you due to losses. There are no guarantees that a market will behave as predicted but you will generally come out on top if you pay attention to it. Finding balance will always be your best move so you can enjoy more consistent results on the overall.