Investing is one of the keys to building wealth, but every dollar you invest risks losing, so strategy is key. From growth and value stocks to dividend income and real estate appreciation, your approach and choices will determine your success or failure over time.
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One of the biggest obstacles is a lack of self-awareness. Overconfidence can make you reluctant to change your strategy even in the face of red flags that it’s time to adjust.
GOBankingRates spoke to investment professionals who have seen people ignore these signs at their own peril. If any of the following apply to you, commit to your financial future and get help building a winning strategy.
Performance consistently degrades over time
Even someone with just a few dollars and zero investment experience can match the market’s average performance with an S&P 500 index fund that mirrors the stock market benchmark index. If you’re not doing at least as well as the greenest novice investor on a budget who buys fractional shares in a single ETF, it’s time to adjust.
“Despite your best efforts, not being able to outperform the market is a red flag,” said Kevin Huffman, a veteran day trader, market analyst, and owner of Criminil Trading. “This is a clear sign that you need to refresh your portfolio strategy to better align your stated goals with your risk tolerance.”
Garrett Smith, a veteran financial advisor and CCO at Ascend Investment Partners, agrees. “All investments are subject to short-term fluctuations, but if an investment continues to lag similar investment vehicles or indexes, it suggests a mismatch in strategy, risk assessment, or asset allocation,” he said. .
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They don’t understand, trust, or love their portfolio.
Your portfolio should be your baby. You need to trust your system even when you’re losing money, and you need to trust your security selection, your ownership percentage of each security, and your overall level of diversification.
Most importantly, you need to know the purpose of all your holdings and why you selected each element of your portfolio in the proportions it does. If you feel like some of your choices were second-guessing or if you frequently second-guess your choices, seek help.
“Another tip is to not be satisfied with your investment portfolio,” Huffman says. “Be wary of people who keep questioning their strategy or who can’t seem to understand how it’s working. Such problems often indicate that it’s time for a change. Lack of understanding and clarity usually leads to poor decisions.”
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Making investment decisions based on emotions
If you don’t trust your choices or trust your portfolio, you’re more likely to make emotional decisions that set you up for failure. If you find yourself panic selling, bandwagon buying, or stock picking based on FOMO, you’re not confident in your strategy and it’s time to forge a new path.
“An approach that consistently provokes panic and euphoria may indicate a misalignment between an investor’s financial plan and their psychological ability to withstand market fluctuations,” Smith says. “Such emotional misalignment suggests that the investment strategy isn’t truly compatible with an individual’s financial temperament or understanding, and can lead to decisions that can undermine long-term goals. .”
Frequently follows tips, trends, and hype
Trend investing borders on emotional investing, if you’re buying or selling based on what’s trending, what’s garnering headlines, or what you think might be the next big thing. Perhaps your portfolio needs some spring cleaning.
“If you’re constantly chasing hot news or jumping headfirst into speculative investments, that’s a red flag,” says Tom Bruzek, a land investor and founder of Sell Land Fast. . “The thought of achieving great success is exciting, but are you relying solely on hearsay and intuition without doing your homework? That’s a recipe for trouble. It may be time to hire a professional to guide you.”
Although my life circumstances changed, my strategy remained the same.
Any major life event should trigger a portfolio adjustment, or at least a rethink of your overall strategy.
“If your financial situation changes, such as due to a raise or a fire sale, your current allocation may no longer be appropriate,” Huffman says. “Significant life events such as getting married, having children, changing jobs, or approaching retirement can certainly cause you to reconsider your investment needs and change your approach. It would be wise to consult a professional to find out if this is the case.”
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Your age doesn’t match your portfolio’s risk level
Changes in your living environment aren’t the only things that guide your investment strategy. Your portfolio should be adapted to your current stage of life and the appropriate level of risk tolerance that changes with age. If not, it’s time to change course.
“For example, an overly conservative portfolio for a young investor with a long-term horizon, or an overly risky portfolio for someone nearing retirement, may indicate a need for strategic readjustment.” said Smith.
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This article originally appeared on GOBankingRates.com: 6 Signs Your Investment Strategy Needs Help