Once investors decide to take charge of their own portfolios, where do they sometimes go wrong? Let's explore several common scenarios and see how investors can overcome them.
They can't find the time
Following a diversified stock portfolio takes a minimum of several hours per week. Otherwise, you won't know what is going in with the companies you own. You also won't be digging around for the under-the-radar value stocks that make up the core of great portfolios. Making real money in stocks takes time and hard work.
Solution: Perseverance. Treat your portfolio as a serious undertaking in your life. Stick to your plan, learn from your mistakes, and enjoy the long-term returns that come from being a smart individual investor. Your neighbors with index funds will be jealous.
Few investors have a wide horizon. They would rather buy Wal-Mart
Solution: Develop a disciplined valuation model that guides your buying and selling. Choose the sectors and types of stocks you're comfortable with, and explore them in depth. You may miss some great stocks that don't fit your model, but you'll always know why you own what you own, and when you should let a stock go.
The flip side of tunnel vision happens when inexperienced investors opt for "concept" stocks that promise huge profits from "the next big thing." Zix
Solution: Stay humble. Don't let a few winners fool you into thinking that you have a magic stock-picking talent. Selecting a few profitable stocks from the sub-$5 bargain basement doesn't make you the next Warren Buffett. You still need to build a solid, diversified portfolio, just like Warren did.
Investing without a disciplined value model is just another form of gambling. A new stock idea should be an automatic "don't buy" until you prove otherwise.
Too much anxiety
Individual investors often focus too much on daily price swings. The small-cap value stock they bought at $8 suddenly dips to $7.50, and they're ready to push the panic button. Or it moves to $10, and they grow anxious to take the quick profit, instead of holding the stock for multibagger gains if the value equation is right.
The good news is that knowing which mistakes to look out for, and applying sound investing rules, can increase your returns dramatically.
Solution: Learn how to lose. The best investors in the world are wrong up to 25% of the time. If you can't accept making mistakes at that rate, let someone else manage your portfolio. Limiting your losses is the best way I know to make money. Profits will follow.
Fool contributor Dale Baker, a private client portfolio manager, owns shares in Brookfield Asset Management for himself and his clients. He likes handy lists of do's and don'ts, and welcomes your questions or comments. The Fool has a disclosure policy.
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