When you were a child, you probably acted like one. But when you’re grown, you “put away childish things,” as the old quotation goes. Unfortunately, many otherwise mature adults still approach investing in a rather immature manner – and it costs them.
Let’s look at some youthful behavior traits and how they manifest themselves as unfortunate investment techniques – and how you can avoid these problems and develop “grown-up” investment habits.
• Lack of focus – Many children find it hard to concentrate on any one thing for long periods of time. They get excited about a particular game or activity for a while, and then they move on to another one. Some investors do essentially the same thing; they follow one investment strategy for a while, then they take some time off, then they follow a new strategy – the pattern goes on and on. If you want the opportunity to achieve investment success, though, you need to choose a strategy that works for you and maintain the discipline to follow through.
• Pursuit of what’s “hot” – Children love the newest toys. In fact, if they see a playmate that has one of these “hot” items, they will let their parents know, in no uncertain terms, that they, too, would like to acquire this toy – quickly. Sadly, some investors also chase after what’s grabbing the most attention – in the form of “hot” stocks. This is not a formula for success; by the time you buy a “hot” stock, it may already be cooling off. And, in any case, the stock may not even be a good fit for your individual risk tolerance or for your diversified portfolio.
• Impatience – Patience is not in big supply among the juvenile set. When children want something, they want it now, and they are not interested in delayed gratification. As an investor, though, you really shouldn’t expect to get big returns in a short period of time. You’re far better off building a portfolio of high-quality investments and holding them for the long term. You may encounter some ups and downs along the way, but your patience should eventually be rewarded.
• Acting emotionally – Children often wear their emotions on their sleeves. If they’re happy or angry, they’ll show it – and they may act on their feelings. For example, if they’re delighted with a new toy, they may drag it with them continuously, never wishing to let it go. Interestingly enough, some adult investors often behave the same way. They may “fall in love” with a stock and never want to sell it, even if it no longer meets their needs; conversely, they may get tired of waiting for a stock to pay off and sell it before it has a chance to move up. To be a smart investor, you need to use your head, not your heart.
Put your experience to work
When we grow up, we learn from the mistakes we made in childhood. Investors can change the errors of their ways, too. By drawing on your accumulating investment experience, you’ll find yourself making fewer and fewer miscues – and you’ll start making steady progress toward your important goals.
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