1 Crucial Strategy To Avoid Awful Investing Mistakes

January 24, 2014

The real point of the exercise above is to show that having a small number of high-risk stocks in a portfolio exposes investors to powerfulpsychological forces. The human brain is much less adept at holding on to a particular stock when it causes a 25% drop in that investor's portfolio. This, in turn, can lead to loss-aversion, causing the investor to prematurely sell the stock after a large market decline.The trading proper allocation of high-risk investments makes it easier to deal with the dramatic ups and downs that come with higher-risk investments and can help to prevent emotional investing decisions. Foolish takeaway In my opinion, one web site of the bigger risks of investing in a small number of companies isn't that a single stock will fall and seriously affect overall returns, but rather that the investor will buy or sell based on an emotional response to dramatic price swings. In business, success generally doesn't happen overnight, and reacting to limited information can be dangerous to those sitting on large portfolio declines. Instead, it can be much better to appropriately allocate investments so one can comfortably watch a business execute its strategy over the long term.
More: http://www.fool.com/investing/general/2014/01/23/1-crucial-strategy-to-avoid-awful-investing-mistak.aspx

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