An investment that doesn’t respect your investor profile, in particular, your tolerance to risk, is definitely going to be a bad investment.
The potential fluctuations of a too-risky investment create stress and volatility that could hinder an investor’s short-term goals. As for the consequences of an investment that’s too conservative, they can be summed up by two things: a high opportunity cost, and the accelerated erosion of your purchasing power due to inflation. Putting up with a scant 2% return without considering the timeframe of an investment, for example, is a mistake. What’s more, if the return of your investments doesn’t succeed in compensating for the increase in the cost of living, the sustainability of your capital over time is at risk… and outliving your capital is definitely the last thing any investor hopes for.
Even worse than a bad investment made in isolation: inadequate diversification.
This is a mistake to avoid at all costs! We’ve all heard the expression “don’t put all your eggs in one basket.” However, good diversification doesn’t mean that your investments are spread out among several financial institutions, but rather that your investments are placed in diverse types of investment products. What every investor needs to research is an optimal combination of asset categories, industries, geographic regions, and even management styles.