Finding a sense of balance is one of the most important things you can do for your investment portfolio. On the one hand, there is the issue of excessive risk aversion. I know a lot of people who were too afraid to participate in the recent massive market recovery. They were hesitant to reinvest after selling when the world was closing down. Yes, for a while, everything appeared to be very scary. However, this can be a problem when trying to save for a rainy day. Missing a 50% move almost certainly means working for many more years to make up for lost ground.
If this describes you, you must create a long-term strategy for returning to equities. If you don’t invest in assets with a higher potential for growth over time, you may end up with a nest egg that’s insufficient to meet your needs.
The flip side of that coin, however, is overconfidence. Or maybe you’re just too enthusiastic about what you’re doing – and a large portion of the investing community has that mentality these days. When investing, you must strike a balance between these two extremes. Excessive enthusiasm (or simply too much confidence) can lead you astray from your investment strategy. Or encourage you to take risks you cannot afford.
Overconfidence in Your Abilities
You must be cautious of developing overconfidence in your abilities. I competed in a national investing competition while in college and was ranked among the top 20 students in the country! Naturally, I was confident in my abilities. My portfolio was performing exceptionally well. It was easily outperforming the S&P 500. In fact, it was several times higher than the S&P 500’s returns during the same time period. Wow!
At the time, I attributed all my success to my exceptional investing abilities. The reality, however, was that we were witnessing a stock market that was rapidly gaining ground. In addition, I chose one stock that performed exceptionally well. I could brag about my top 20 accomplishments for the rest of my life. However, it was simply a lucky dart throw that landed on the bullseye.
Luck Does Not Equal Skill
It’s human nature to attribute such accomplishments to some internal skill rather than pure luck. It becomes easier to take risks once you believe you are an investing genius. Some of those risks are probably beyond your comfort level. But who knows? After all, you’re a seasoned investor! Whatever you choose will undoubtedly be a wise decision.
When this happens, it’s tempting to go after even bigger gains. This may cause you to deviate from your investment strategy. This is where things start to get dicey, both for your portfolio and your financial future. When you get too excited about chasing higher and higher profits, you start looking at increasingly risky assets. You run the risk of losing a lot of money.
Don’t Go After Missed Gains
Confidence, euphoria, and the fear of missing out can all play tricks on our minds. Tesla is one of the stocks I failed to pick. This one really hurts. A few of my friends jumped on board at the right time. They’ve made their money several times over in just a few months. It doesn’t help that the stock is gaining ground daily, and I have to see them brag about it on social media.
My desire to make up for lost ground (despite my own portfolio’s recent gains) became intense. That’s when the reckless notion of betting the farm on that one stock enters my mind.
That Hail Mary game could have worked. If I did it, I might have won the lottery. However, I’m glad I was able to control my emotions. The outcome could have easily been different. (Actually, they were more likely to.) The reality is that, while the gains would have been highly beneficial to my finances, I will still be comfortable and on the solid financial ground without that massive risk.
In some ways, winning this bet doesn’t benefit me all that much. But I will definitely lose a lot if the stock begins to fall after I have invested everything.
Maintain Your Plan
If your portfolio begins to feel bulletproof, it’s time to take a step back. Are you tempted to abandon your long-term investing strategy in favor of riskier assets that may provide more significant short-term gains? If that’s the case, be cautious! In the short term, markets are extremely volatile. It is now easier than ever to begin investing in suspect assets. This could jeopardize your portfolio and your future.
Stop and think about what you’re doing before you get too excited about changing things up because you’re excited about past performance. Read over your investment strategy again. Why do you continue to invest in stocks that you already own? Do you intend to make a long-term change? Or are you simply caught up in the present? Will your feelings change if you decide to invest in something that goes downhill?
While there’s nothing wrong with trying something new, make sure it’s with money you can afford to lose. Maintain your long-term strategy. Then, experiment with some spare cash that isn’t being used to secure your future. If you make the wrong bet, you won’t have to eat Ramen every night.
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