Many investors base their decisions on emotions, rumors or chasing the next hot opportunity, and they often end up losing money as a result. But despite their setbacks, they continue with the same behavior and keep getting the same results. Removing the barriers to success is crucial to changing investors' behavior and enabling them to become successful. All investors, no matter how successful, must strive to continuously remove new barriers as they appear. Read on to discover how to uncover and remove any barriers to success you may have.
Barriers are those characteristics we possess that keep us from achieving success. All investors can make a list of the barriers they have to overcome before they can achieve their goals. Actually knowing the barriers is the first step to removing them. Many people, however, struggle as they repeatedly make the same investing mistakes. Usually the reason is they have not identified what keeps them from their investing success.
So what are some of these barriers? Keep in mind that each investor has his or her own hurdles that they must overcome - the barriers discussed here are some of the most common.
Emotion is one of the most common of human experiences. The fear and greed many individual investors experience often clouds their ability to rationally think through an investing opportunity. This results in poor investment decisions and usually a loss of money.
For example, even though it is in an investor's best interest to sell high and buy low, investors hate to sell winners and are reluctant to buy out-of-favor stocks. Further, many investors hold onto winning investments too long. When they fall back, they continue to hold on to them, hoping they will return to their new highs. They even tell themselves that they will sell - if the price returns to the level at which they bought it.
Then there are the investors who hold on to losing investments for too long. They hope that if they wait until their shares recover, they can sell to at least break even, sometimes even adding to a loser. Meanwhile, their capital is tied up in a losing investment and is, therefore, unable to produce a return. This reduces account balances and increases stress levels. Most investors cite holding investments too long as the mistake that was most detrimental to their success.
Lack of Knowledge
Sometimes investors incorrectly think you just need to buy and sell the right stock and you can always make money. Investors can sometimes have little understanding of how markets work, what drives stock prices and successful investing performance. Further, many investors tend to overestimate their ability to beat the market, and as a result they take on unnecessary risks.
People are often irresistibly drawn to strong performance, even when it's not sustainable. Many investors chase the latest hot sector without sufficiently understanding why or the risks involved.
For example, even though investors realize they should not overweight their portfolios with too much money in one investment, they continue to do so. Oftentimes, people buy too much stock in the company where they are employed, because the company's available retirement funds and use of options as a part of their compensation package makes this easy. This may, however, leave investors with a portfolio that lacks diversification.
Other investors do not understand how bonds work, so they avoid them. Few realize that bonds hold a preferred position should a company declare bankruptcy. Many others do not understand that when interest rates rise, bond prices usually go down. When it comes to understanding such important concepts as how the Central Bank sets interest rates and the yield curve, even fewer investors have sufficient knowledge to make rational decisions.
Finally, most investors do not know when to sell a stock that has substantially appreciated. They continue to hold onto the stock instead of selling part of their position to capture some of the profit and to make capital available for other, more promising, investments. They fail to realize that as the price of the stock goes up - their portfolio becomes increasingly unbalanced, favoring the appreciated stock. The market is a great equalizer and usually readjusts portfolios for investors - sometimes to their dismay. Many investors are confused by the notion that rebalancing entails selling some of the investments that have performed best and buying more quality stocks that have lagged.
Losing Sight of the Big Picture
While many investors say they invest with a long-term perspective, they continue to make decisions based on short-term movements and ideas. Most investors believe that setting long-term goals for such things as buying a home, saving for college and providing for retirement are important, yet they fail to establish viable financial plans to do so.
Without these plans in place, their decisions are subject to the ebb and flow of the current market. Basing decisions on unpredictable market fluctuations can be dangerous, and there is a good chance that these investors will make the wrong decision, hindering their ability to achieve their long-term goals.
When the average investor realizes that the market has risen, they pour cash into stocks and mutual funds, trying to capture some of the profit the professionals have realized. When the market puts in a decline, the average investor panics and sells near the bottom. All too often, this pattern continues, causing the average investor to lose much of his or her capital and become disillusioned with stocks.
Strategies to Remove Barriers
No matter what your barriers might be, it is important to put together an action-oriented plan to remove them. Here are seven steps you can take to remove these barriers to your investing success:
- Learn to monitor your performance. Measuring your performance creates a track record of what has worked and what has not. This allows you to identify problems that you repeat. While some investors capture a great amount of detail, you should, at a minimum, document the overall market trend, the sector trend, the rationale for making the trade, the exit target and the trailing stop. Do this for each buy (or short) as well as sell (or cover). This record will be very useful in assessing your investing activities over time and can be used to identify what barriers you are encountering that hinder your success.
The Bottom Line
Removing your barriers to investing success is an ongoing process. By following a defined plan, you can identify and formulate a program to remove the barriers that keep you from achieving success as an investor.
More From Investopedia