You can find loads of information online about avoiding investing mistakes. What you’ll find less of is real talk about the inevitability of investing mishaps.
If you’re buying financial assets, you will mess up here and there. You might pick the wrong stock or fund. You might invest too much. You might get too enthusiastic about stocks and forget to balance your risk with fixed income.
You can learn your way around some of these mistakes, but not all of them. To support that statement, I’ll enlist the help of famed investor Warren Buffett, also known as the Oracle of Omaha. In his 2021 letter to Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shareholders, Buffett said, “I make many mistakes.”
Buffett’s admission came as he described the range of performance trends among Berkshire Hathaway’s assets. Some of the conglomerate’s businesses do very well, others perform acceptably, and still others are “marginal.”
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If Buffett’s making investing mistakes, then all investors are. We can’t avoid them. What we can do is manage the impact of those mistakes, financially and emotionally. Here are four strategies that will help.
1. Diversify across asset classes
Investments are grouped into asset classes, or categories that have similar behaviors and risk/reward characteristics. Stocks are an asset class. Bonds, cash, and real estate are also asset classes.
Stocks have high growth potential but also high volatility. Bonds produce stable income but don’t appreciate the way stocks do.
When you hold stocks and bonds together, you have elements of growth and stability. To some extent, you can tailor the behavior of your portfolio by holding more or less of each asset class. If growth is more important to you, you’d hold a high percentage of stocks. If you’d prefer lower growth in favor of stability, you’d hold more bonds.
Diversifying into real estate, cryptocurrency, and other alternative assets can provide growth that’s less dependent on stock market cycles.
2. Diversify within asset classes
To diversify within an asset class, you’d own multiple stocks, multiple bonds, or multiple cryptocurrencies, for example.
For stocks, the rule of thumb is to own 20 to 25 different companies, spread across multiple economic sectors such as technology, utilities, or finance. You can accomplish this by handpicking stocks or by investing in one or more diversified funds.
3. Commit to investing long-term
Diversification minimizes the effects of choosing the wrong security. Likewise, committing …….