Many investors base their decisions on emotions, rumors, or chasing the next hot trend, and they often end up losing money as a result. But despite their setbacks, they continue with the same behavior and keep getting the same results. Removing the barriers to success is crucial to changing investors' behavior and enabling them to become successful.
All investors, no matter how successful, must strive to continuously remove new barriers as they appear. Read on to discover how to uncover and remove any barriers to success you may have.
- Barriers are those characteristics we possess that keep us from achieving success.
- All investors should recognize the barriers they have to overcome in order to achieve their goals. Actually knowing the barriers is the first step to removing them.
- Many people, however, struggle as they repeatedly make the same investing mistakes.
- Usually the reason is they have not identified what keeps them from investing success.
- Each investor has his or her own hurdles that they must overcome—the barriers discussed here are some of the most common.
Emotion is one of the most common of human experiences. The fear and greed many individual investors experience often clouds their ability to rationally think through an investing opportunity. This results in poor investment decisions and usually a loss of money.
For example, even though it is in an investor's best interest to sell high and buy low, investors hate to sell winners and are reluctant to buy out-of-favor stocks. Further, many investors hold onto winning investments too long. When they fall back, they continue to hold on to them, hoping they will return to their former highs. They even tell themselves that they will sell—if the price returns to the level at which they bought it.
Then there are the investors who hold on to losing investments for too long. They hope that if they wait until their shares recover, they can sell to at least break even, sometimes even adding to a loser. Meanwhile, their capital is tied up in a losing investment and is, therefore, unable to produce a return. This reduces account balances and increases stress levels. Most investors cite holding investments too long as the mistake that was most detrimental to their success.
Lack of Knowledge
Sometimes investors incorrectly think you just need to buy and sell the right stock and you can always make money. Investors can sometimes have little understanding of how markets work, what drives stock prices, and successful investing performance. Further, many investors tend to overestimate their ability to beat the market, and as a result they take on unnecessary risks.
People are often irresistibly drawn to strong performance, even when it's not sustainable. Many investors chase the latest hot sector without sufficiently understanding why, or the risks involved.
For example, even though investors realize they should not overweight their portfolios with too much money in one investment, they continue to do so. Oftentimes, people buy too much stock in the company where they are employed, because the company's available retirement funds and use of options as a part of their compensation package makes this easy. This may, however, leave investors with a portfolio that lacks diversification.
Other investors do not understand how bonds work, so they avoid them. Few realize that bonds hold a preferred position should a company declare bankruptcy. Many others do not understand that when interest rates rise, bond prices usually go down. When it comes to understanding such important concepts as how a central bank sets interest rates and the yield curve, even fewer investors have sufficient knowledge to make rational decisions.
Finally, most investors do not know when to sell a stock that has substantially appreciated. They continue to hold onto the stock instead of selling part of their position to capture some of the profit and to make capital available for other, more promising, investments. They fail to realize that as the price of the stock goes up—their portfolio becomes increasingly unbalanced, favoring the appreciated stock. The market is a great equalizer and usually readjusts portfolios for investors—sometimes to their dismay. Many investors are confused by the notion that rebalancing entails selling some of the investments that have performed best and buying more quality stocks that have lagged.
Losing Sight of the Big Picture
While many investors say they invest with a long-term perspective, they continue to make decisions based on short-term movements and ideas. Most investors believe that setting long-term goals for such things as buying a home, saving for college, and providing for retirement are important, yet they fail to establish viable financial plans to do so.
Without these plans in place, their decisions are subject to the ebb and flow of the current market. Basing decisions on unpredictable market fluctuations can be dangerous, and there is a good chance that these investors will make the wrong decision, hindering their ability to achieve their long-term goals.
When the average investor realizes that the market has risen, they pour cash into stocks and mutual funds, trying to capture some of the profit the professionals have realized. When the market puts in a decline, the average investor panics and sells near the bottom. All too often, this pattern continues, causing the average investor to lose much of his or her capital and become disillusioned with stocks.
Strategies to Remove Barriers
No matter what your barriers might be, it is important to put together an action-oriented plan to remove them. Here are seven steps you can take to remove these barriers to your investing success:
- Learn to monitor your performance: Measuring your performance creates a track record of what has worked and what has not. This allows you to identify problems that you repeat. While some investors capture a great amount of detail, you should, at a minimum, document the overall market trend, the sector trend, the rationale for making the trade, the exit target, and the trailing stop. Do this for each buy (or short) as well as sell (or cover). This record will be very useful in assessing your investing activities over time and can be used to identify what barriers you are encountering that hinder your success.
- Once you have measured your behavior, you can identify what you want to change: Examine your past trading activity and look for patterns that point to barriers to success. Do you impulsively buy the next hot stock without doing your homework? Does your rationale for buying the stock prove to be wrong most of the time? The key is to identify the investing behavior that hinders your performance.
- Stay focused on what you need to change: Changing one's behavior requires a steadfast focus on what you seek to change. Like any effort to change behavior, you must remain focused on the actions you take to reinforce the investing behavior you wish to have. If you feel you are not focused on how to change your behavior, then take a break from your investing until you have regained your focus.
- Identify how you will deal with losses: Losses are a part of investing. Learning how to deal with them is one of the cornerstones of successful investing behavior. It starts with predefining what your loss looks like through your stop loss and rationale for the trade. Once this criterion is met, you take the loss and move on. Confronting and accepting a loss is a trading skill that is an essential behavior. By making the execution of a losing trade an automatic process in your trading strategy, you remove the emotion that comes from a loss. This opens you up to the next opportunity without fear.
- Become an expert at one investing strategy: There are many ways to assess the market and select stocks that offer good investment opportunities. Too often, investors become overwhelmed with all the information that is available. Instead of trying to understand every perspective on a stock, it is best to get to know one proven investing strategy. While you might miss some opportunities, you will gain confidence in your investing approach. The knowledge you gain will form a solid base for your investing. Later, when you have become an expert in this approach, you can expand your knowledge base by adding a new approach that compliments your proven strategy.
- Learn to think in probabilities: Because the market is in perpetual motion, it places the investor in the position to continually assess the risk-reward ratio of each opportunity. You can't move the market, so you need to assess what is the greatest possibility that will move the market, key sectors, and the stocks you are watching. Assessing what is most likely to happen in terms of probabilities will help you make valid investing judgments.
- Learn to be objective: Many investors want to believe that the market will do what they think it should do, rather than what it actually does. Any limits you place on the market will usually turn out to be wrong. The market does what the market does. Investors are best served if they maintain an objective perspective. If you are objective, then you will:
Not feel pressured to act quickly
- Not be afraid to make an investment decision
- Not force your opinion on the market, but rather sense what the market is trying to tell you
Frequently Asked Questions
What do you mean by barriers to investment?
Barriers are those impediments that keep investors from making objective, rational, and good decisions. While everybody will have their own unique set of barriers, the role of emotion, gaps in one's knowledge, and issues around self-control and patience tend to be quite common.
What is the first step to removing barriers?
The first step is to recognize that you have barriers and identify what they are. Making a list can be helpful.
Once I know my barriers, what should I do?
Having an objective and disciplined approach to investing that removes emotion and bias is always helpful. Becoming more knowledgeable about the markets, investment strategies, asset classes, and behavioral finance are also helpful.
The Bottom Line
Removing your barriers to investing success is an ongoing process. By following a defined plan, you can identify and formulate a program to remove the barriers that keep you from achieving success as an investor.