Active investors manage their own investments rather than simply follow the market. Active investors use their knowledge and experience to find market opportunities that can provide greater returns than traditional passive investing options, such as index funds and ETFs. While active investing is riskier than passive investing, it can also lead to higher returns if done correctly.
Don’t Let Your Feelings Take over
With so many things to worry about in life, it’s easy to let your emotions take over when you’re doing active trading.
Some emotions can be positive (excitement and hope), but others are negative (fear and frustration). And sometimes, a combination of these emotions can make you want to pull out your hair and sell everything.
But if you want to be successful as an active investor, don’t let your feelings take over. The market will always win in the long run, so don’t get caught up in its ups and downs.
Don’t Follow the Crowd
Someone says following the crowd is never a good idea. Don’t get caught up in the hype or let your feelings take over. Instead, think about what you’re investing for and be honest about your goals. If you’re saving for retirement, then learn how to invest passively by building a portfolio that includes low-cost ETFs on an automatic rebalancing schedule.
That way, you can sit back and watch your money grow over time without having to worry about day-to-day market movements or actively trading stocks or funds with higher fees (which will cost more than they make).
Don’t Use Averages
You should be aware that the average is not the best measure of central tendency, and it can be misleading. For example, if you’re told your portfolio has an average annual return of 10%, you might think that’s great: after all, 10% is a lot better than what your savings account pays.
However, if you dig deeper into the data and find out that 75% of investors made between 8% and 12%, while 25% made above 20%, then the “average” doesn’t tell you much at all about where you stand in relation to everyone else.
Averages can also be misleading because they fail to consider important outliers (i.e., large deviations from the mean).
Don’t Over-Optimize Your System
You don’t want to spend hours trying to squeeze out every last cent of performance from your strategy because you will probably end up with a convoluted, overly complex system that is not really worth the effort. In general, it’s better to be simple and intuitive than precise in what you are doing. Instead, it would be best if you focused on understanding how the market works rather than trying to be too clever or complex by using complex models with lots of parameters.
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This article must have helped you to understand the pitfalls of active investing and how to avoid them. Keep in mind that with any investment strategy, there will be mistakes made along the way. This is why it’s essential to try different approaches and keep track of what works best for you to adjust accordingly.
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