Making a million could be a more realistic goal than many people realise. Certainly, it is likely to take time. However, by living within your means and investing in the stock market, it is possible to build a surprisingly large nest egg in order to retire early.
Of course, there are numerous pitfalls that could delay the achievement of a seven-figure portfolio. Here are three common mistakes made by a wide range of investors. Being able to avoid them could enhance your long-term financial prospects.
Cash balances
Having some cash on hand can be a great idea. It provides the capital required to pay for unexpected costs, such as repair bills, and also provides peace of mind.
However, having too much cash for too long can be detrimental to your financial future. In the long run, it is unlikely to offer an inflation-beating return. In the short run, its returns could even fall due to global economic uncertainty and the prospect of a looser monetary policy being implemented by central banks.
As such, having a modest cash balance and investing other excess capital could be a shrewd move. It may produce higher returns which, over the course of a lifetime, has a significant impact on your portfolio valuation.
Long-term investments
Although buying and selling stocks can be exciting – especially when they rise in value – a buy-and-hold strategy could be more effective. Not only could it reduce overall commission costs, it may enable your holdings to deliver on their growth prospects.
Often, it can take a number of years for a company's strategy to have the intended impact on its financial performance, as well as on investor sentiment. Furthermore, selling stocks without having a better destination for your capital from a risk/reward perspective may not be an effective or logical decision. This means that allowing stocks which have produced high returns to continue to do so may be more profitable than crystallising their gain.
Diversification
Building a portfolio that contains a wide range of stocks can be challenging. It requires an understanding of multiple industries and sectors, which can take time to acquire.
However, it is imperative to diversify in order to reduce risk. This means that the impact of a negative performance from one stock on a portfolio is minimised, which can help a portfolio to maintain an upward trajectory over the long run.
For investors with modest amounts of capital or knowledge, a sound means of diversifying is to buy a tracker fund. This aims to follow the performance of an index such as the FTSE 100 or S&P 500. Alongside this, gradually buying individual stocks as they become appealing could be a worthwhile move. This may lead to outperformance of the wider index, an improvement to your risk/reward ratio, as well as an increased chance of making a million.
