Investing always requires a certain amount of risk. Conventional wisdom states that the greater the risk, the greater the reward, but many investors are reluctant to put too much of their hard earned money into investments that could potentially leave them with less than they started with. At the same time, being too cautious, and investing only where the risk of loss is small isn’t a smart strategy either. After all, low risk equals low gains.
These days many people are more cautious than ever when it comes to investing. We’ve all heard the horror stories that came out of the Great Recession, and with so much uncertainty, many are reluctant to pin their future financial security on the fluctuations of a volatile market.
Still, investing is one of the best ways to build wealth, and while the market is unpredictable, being over cautious will only hurt you in the long run. Here are some signs that you’re not taking enough risks.
1. Your Returns are Too Low
Calculating the average return on investment is complicated. There are a number of factors to consider, including fees, taxes, market activity, and overall stock performance. Still, experts suggest that most investors should plan on a return on investment of about six to eight percent annually. If your returns are significantly lower — as in less than half of the average return — you should consider reviewing your strategy.
2. None of Your Investments Are In Stocks
Since the market bottomed out in early 2009, many people have been afraid to put money into stocks for fear of losses. However, since then, the S&P 500 has gained more than 150 percent — and skittish investors have missed major returns by not being in the market. In short, stocks are the best way to earn major returns over time, especially when you enter the market when there are stock bargains to be found. Bottom line? If you have all of your money everywhere but the market, you aren’t leveraging it effectively.
3. You’re Too Focused on the Past
Too many investors look at stock performance in the past — whether a few weeks or a few years — to determine whether it is a good investment, instead of looking to the future to see where the investment can go in the future. This leads to two potential issues. First, investors may avoid stocks with weak or slow performance in the recent past out of fear, ignoring signs that the stock could take off and pay off huge dividends.
On the other hand, “rearview mirror” investments may lead investors to make decisions based on past gains, even though signs are pointing to a correction or decrease in the stock’s value going forward. Either way, basing investment decisions based entirely on what the funds or stocks did in the past might seem like a smart choice, but it actually could lead to losses. Instead, look at the overall long-term trends, and plan for the future — not the past.
4. You Think in the Short-Term
Shortsighted thinking is especially common among those who have most of their investments in a 401(k) retirement plan. When the market experiences a significant drop such as that in 2008, it’s common for investors to panic and move toward “safer” investments. For many people, those plans represented their life savings, and they made decisions in an attempt to “protect” that money.
However, what those investors fail to realize is that investing is best approached in the long term. Reacting to short-term fluctuations with panic almost always results in lower gains. Instead, it’s better to approach investing from a long-term perspective, understanding that losses incurred today aren’t permanent, and that future gains will more than offset them.
5. You Miss Opportunities
Have you ever regretted not jumping on an opportunity after seeing the returns that others netted? Has it happened more than once? Experts note that one of the pitfalls of overcautious investing is the fact that it’s difficult, if not impossible, to perfectly time each investment. Many people who pulled their money out of the market in 2008 and 2009 did so with the thought that they would put it back when the time was right — only many missed increases in the market that would have resulted in big gains. If you see an opportunity, do your diligence, but don’t wait so long that you miss gains.
A certain amount of caution is important when making investment decisions, but you don’t want to miss gains because you were too careful. Work with an advisor you trust, learn to interpret financial news, and don’t make decision based on fear, and you’ll be able to invest with confidence.