In a presentation delivered by Patrick O’Shaughnessy, portfolio manager at O’Shaughnessy Asset Management, he proposed that millennial investors are making three crucial investment mistakes.
1. They are not saving enough money
2. They are following a poor asset allocation model
3. Their stock selection skills are lacking
Mistakes like these directly influence the outcome of your portfolio performance and should be addressed immediately.
Considering how we are in the business of simplifying investing and empowering the individual investor to achieve their desired returns, we would like to tackle these issues head on. So if you are a millennial investor who commonly makes the same mistakes, I recommend reading our solutions to these typical investing flaws.
Flaw #1: Not saving enough money
Putting money aside for savings is not always easy, especially when you want to spoil your family with a vacation, treat the special person in your life to a fancy dinner or buy the latest gadgets. Saving is not nearly as fun as spending, but if you want to continue treating your loved ones for many years to come, you have to set money aside for your future investments.
Saving money is an essential part of the investing process. Most investors start out small and, therefore, have to constantly contribute to their portfolio to see a difference. If you have a nest egg to invest, you will see a difference sooner than others, but it doesn’t mean you should stop saving and contributing to your portfolio. Six percent annualised returns on $10,000 compared to $100,000 is a massive difference. The bigger your portfolio, the quicker it will grow in value, due to the effect of compounding interest. Continue saving so that you can grow your portfolio's value and take full advantage of the stock market.
In the words of Warren Buffett: “Don't save what is left after spending; spend what is left after saving.” Pay yourself first and then your bills. Choose a realistic amount to save monthly and regard that amount as simply another bill to pay. Set up an automatic transaction, as you would do for your other bills, but instead of paying someone else, the money goes into a personal savings account. After savings and settling your bills, you can go ahead to spend whatever is left. In doing so, you will make saving a priority.
Flaw #2: Following a poor asset allocation model
A common challenge many millennial investors face is allocating their assets for minimum risk and maximum reward. Too many investors place all of their eggs in one basket, exposing their portfolio to unnecessary risk.
Diversification is key. Divide your money between asset classes of differing risk, market cap, industry, geography and currency. Lower risk instruments will offer safety and stability but also low returns, counterbalancing the higher risks associated with equities. This strategy takes advantage of market peaks and troughs to generate a positive risk-return ratio.
But which classes should you choose, how much should you assign to each class and where exactly should you invest? It depends on your circumstances. If you are interested in finding the answers to these questions, you should read our Asset Allocation and Effective Portfolio Management eBook.
Flaw #3: Stock selection skills are lacking
Unfortunately, most investors pick the most talked about stocks. When a company receives regular media attention, the chances of its shares being overvalued are highly probable. Ironically, investors still buy these shares, because they are led to believe they are wonderful investments.
In many cases, the best performing value stocks are not the ones everyone is talking about, but rather the ones you have never heard of or struggle to pronounce.
Stock picking is not everyone’s forte, but that doesn’t mean you should stop investing. These days you don’t need years of investing experience to know which stocks to pick and which to pass up. The latest investing technology empowers individual investors to invest successfully, without the help of a professional. Subscribe to a stock picking tool that shows you which stocks to buy or sell, when to buy or sell them and how much to buy or sell them for. It eliminates the need for guessing and cuts through the noise to find only the best investments for you.
Now that you have the solutions to these common investment mistakes, you should go ahead and implement them immediately. Making these simple changes to your budget, allocation model and stock selection strategy will have a massive impact on your portfolio performance and overall return rate. If you experience any other investing challenges, give us a shout, and we will see if we can include a solution in a follow-up article.
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