While making mistakes can be a valuable learning curve for every investor, they can prove costly in the short run. With that in mind, here are three investment lessons which I wish I had known at the very start of my investing career. Following them could have helped boost my portfolio returns.
Bear markets always come around
Deciding when to buy shares is one of the most difficult aspects of investing. The truth is that the vast majority of investors feel more comfortable buying when the outlook for the economy is positive. Doing so seems to be less risky, since the future may appear to be clearer and a path to profitability may seem much easier than it is during a recession.
However, the fact is that bear markets are inevitable. They have always taken place, and always will do. As such, it can make sense for an investor to wait for more difficult periods for the stock market before buying. Doing so can lead to far lower buying prices than investing during a bull market. In the long run, this can mean significantly higher profits.
The reward for taking risks could be worth it
For an investor with a long-term outlook, taking high risks can be a worthwhile strategy. Clearly, it can mean a difficult short-term period, since volatility may be high and paper losses are never a pleasant experience. However, in the long run, taking more risks can lead to higher rewards.
For example, mid- and small-cap shares generally offer higher rewards than their larger counterparts. They may also have lower dividend yields and greater volatility, but for an investor with a more-than-10-year time horizon, they can be a worthwhile investment. Although taking too much risk is clearly not a wise move, not taking enough risk can lead to disappointing real returns in the long run.
Take a view (if you have time)
While diversification is a sensible move, in some cases it is all too easy to become over-diversified. This essentially means that a portfolio moves in a very similar fashion to the wider index, so there is the danger of it becoming akin to a tracker fund.
Often, investors who have experienced a difficult period with their portfolios will seek to diversify as much as possible. While this can reduce risk, it can also mean lower returns as well as higher commission costs. For smaller portfolios, the latter can be a major challenge.
As a result, for investors who have time to research stocks it may be worthwhile maintaining a degree of diversification, but not so much as to dilute the impact of shrewd decision-making. Doing so may mean higher volatility than the wider index and the potential for higher losses. But for investors who are able to hold on to their shares for the long run, the rewards could be worth the risk.