One of the most important things you can do for your investment portfolio is find a sense of balance. On one hand, there is the problem of too much risk aversion. I know quite a few people who’ve missed out on the recent gigantic market recovery because they were too scared. They hesitated buy back in after they sold when the world was shutting down. Yes, everything looked really scary for a while. However, this can be problematic when you are trying to build up a nest egg. Missing a 50% move probably means working quite a few more years to make up the lost ground.
If this is you, then you need to come up with a plan to get back into equities for the long term. Without investing in assets that have a greater potential for growth over time, you could end up with a nest egg that’s too small to accomplish what you need it to.
The other side of that coin, though, is too much confidence. Or maybe just too much enthusiasm for what you’re doing. There’s a significant portion of the investing population with that mentality these days. When you are investing, you need to find a balance between those two extremes. Over-enthusiasm (or just too much confidence) can lead you astray from your investing plan. Or encourage you to take risks that you can’t afford to take.
Too Much Confidence in Your Abilities
You have to be wary of developing too much confidence in your abilities. When I was in college, I participated in a national investing competition. I placed in the top 20 students in the country! Naturally, I felt very confident about my abilities. My portfolio was doing extremely well. It was beating the S&P 500 handily. In fact, it was a few times higher than the returns the S&P 500 was making during the same period. Wow!
I was attributing all that success to my awesome investing acumen at the time. The reality, though, is that we were seeing a stock market that gained ground quickly. Plus, I managed to pick one stock that did incredibly well. I could hype up my top 20 achievement for the rest of my life. However, it was really just a lucky dart throw that happen to land on the bullseye.
Luck Doesn’t Equal Skill
It’s human nature to attribute an achievement like that to some internal skill, rather than sheer luck. Once you start thinking that you are an investing genius, it becomes easier to take risks. Some of those risks are probably outside of your tolerance zone. But who cares? After all, you are an ace investor! Surely, whatever you pick will turn out to be a great choice.
Once this starts happening, it’s tempting to chase even higher gains. That might cause you to stray from your investing plan. This is where things get dangerous — both for your portfolio and for your financial future. When you are too enthusiastic about chasing higher and higher profits, you start looking at assets that are increasingly risky. You can easily run the risk of losing big time.
Don’t Chase Missed Gains
Confidence, coupled with the euphoria and fear of missing out, can play tricks in our minds. One of the stock picks I’ve missed out on is Tesla. This one really stings. A few of my friends bought into it at the right time. They’ve made their money multiple times over in a few short months. It doesn’t help that the stock is making big gains every single day and I have to see them brag about the gains on social media.
My desire to make up that lost ground (even though my own portfolio has gained so much lately) got really bad. That’s when those reckless thoughts of betting the farm on that one stock starts to cross my mind.
Sure, that Hail Mary play could have worked. I may have won the lottery if I did it. However, I’m glad I was able to keep my emotions in check. The result could easily have gone the other way. (In fact, they were more likely to). The reality is that while the gains would’ve been extremely good for me financially, I am still going to be comfortable and on financial solid footing without that massive risk.
In a way, I don’t benefit that much from winning this bet. But I definitely lose a great deal if the stock starts tanking once I bought in with everything.
Stick to Your Plan
If you start to feel bullet-proof in your portfolio, it’s a good time to take a step back. Are you tempted to abandon your long-term investing plan in favor of risky assets that might result in bigger short-term gains? If so, watch out! Markets are very volatile in the short term. It’s currently easier than ever to start investing in suspect assets. That will potentially put your portfolio and your future at risk.
Before you get too excited about switching things up because you are enthusiastic about past performance, stop and think about what you are doing. Dust off your investment plan and read it again. Why do you invest in the stocks you already own? Are you planning to make a long term change? Or are you just caught up in the moment? Will your feelings change if whatever you decide to invest in starts tanking?
While there’s nothing wrong with trying something different, just make sure you’re doing it with money you can afford to lose. Keep your long-term plan in place. Then experiment with a bit of extra money that isn’t being used to secure your future. That way, you won’t be eating Ramen every night if you make the wrong bet.
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