2021 is not a typical year for investing due to last year’s volatility and its economic ramifications. Now, some entrepreneurs are panicking and making avoidable investment mistakes. Entrepreneur Delos Chang shares the top three mistakes entrepreneurs need to avoid in 2021 in order to maintain a successful investment portfolio.
- Thinking Only in the Short Term
The economic downturn of the last year has caused a lot of people to narrow their frame of reference. They sell off stocks or investments that did poorly in the last year because their emotional memory is biased. But according to Chang, you need to invest with a long-term thesis and ignore short-term volatility. “You should formulate a thesis for the long-term and stick with it unless something affects your underlying conviction.” He also notes that “your thesis is only as good as your best steelman argument, namely what would make you bearish. If you can’t think of anything that would invalidate your thesis, there is a good chance you are biased.” Chang says careful thinking and patience is key to this process and recommends clearly outlining and writing down your thesis before entering a position.
- Making Emotional Investment Decisions
“Investing is a logical, strategic process,” said Chang, “not an emotional one. And yet, many people let their emotions make their financial decisions.” When an investment does poorly, we tend to get scared and want to sell it off quickly. When it shows high returns, we want to buy it, even if we don’t fully understand it. According to Chang, it is too easy to mistake emotion for intuition on the markets. To familiarize ourselves with our emotional memory, Chang recommends journaling every trade or investment we make as well as how we feel during different points with the markets. “The more you understand yourself and how you react to certain situations, the more you can pattern-interrupt yourself.” Finally, Chang recommends aspiring investors to be emotionally neutral with their investments. “The euphoria you feel when the market moves in your favor is exactly what inspires fear and pain when the market changes direction.”
- Not Understanding Your Investments
According to Chang, it is more important than ever to avoid this mistake in 2021. “The market has changed due to last year’s downturn, and there are some new industries that are performing really well for the moment,” said Chang. “But do not invest in anything simply because it is performing well. Make sure you truly understand what you are investing in and have evaluated it for its long-term value.” Without true understanding and due diligence, you will lack conviction and act out of fear when the market moves against you.
Compiling an investment portfolio is a logistical, strategic process. Last year’s economic downturn has left a lot of people reeling, and entrepreneurs are making some completely avoidable investment mistakes.