The Problem With Investment Funds

The Problem With Investment Funds

Overview

When you invest in something you don’t understand   

One of the world’s most successful investors, Warren Buffett, cautions against investing in businesses you don’t understand. This means that you should not be buying stock in companies if you don’t understand the business models.  

The best way to avoid this is to build a diversified portfolio of exchange-traded funds (ETFs) or mutual funds. If you do invest in individual stocks, make sure you thoroughly understand each company those stocks represent before you invest. 

Waiting to get even   

Getting even is just another way to ensure you lose any profit you might have made. This means you’re waiting to sell a loser until it gets back to its original cost basis. Behavioural finance calls this a “cognitive error.” By failing to realise a loss, investors are actually losing. 

Falling in love with a company   

Too often, when we see a company we’ve invested in do well, it’s easy to fall in love with it and forget that we bought the stock as an investment. Always remember, you bought this stock to make money. If any of the fundamentals that prompted you to buy into the company change, consider selling the stock. 

The Volume and Speed of Information   

Perhaps the most daunting challenge that modern investors struggle with is the sheer speed and volume of information. In the past, solid information about publicly traded companies was hard to come by outside of the annual and quarterly reports.  

Then the Wall Street Journal and a limited number of finance related publications attempted to collect business news and spread it to others, but this news moved to the greater public at the speed of print, if at all. In order to be reported, a story had to be significant; and even then, it had to be written up, printed and delivered. 

Now, even obscure companies produce a constant stream of information, from the daily price fluctuations in the stock to announcements and posts on dedicated message boards. When information floods in, it can be difficult to pick out what’s important.  

Categories: Financial tips