Making mistakes is part of the learning process. However, it’s all too often that plain old common sense separates a successful investor from a poor one. At the same time, nearly all investors, new or experienced, have fallen astray from common sense and made a mistake or two. Being perfect may be impossible, but knowing some of common investing errors can help deter you from going down the well-traveled, yet rocky, path of losses.
Here are some of the most Common investing mistakes & stock buying mistakes.
1. Investing in Something You Don’t Understand
One of the world’s most successful investors, Warren Buffett, cautions against investing in businesses you don’t understand. This means that you should not be buying stock in companies if you don’t understand the business models. The best way to avoid this is to build a diversified portfolio of exchange-traded funds (ETFs) . If you do invest in individual stocks, make sure you thoroughly understand each company those stocks represent before you invest.
2. Falling in Love with a Company
Too often, when we see a company we’ve invested in do well, it’s easy to fall in love with it and forget that we bought the stock as an investment. Remember: you bought this stock to make money. If any of the fundamentals that prompted you to buy into the company change, consider selling the stock.
3. Lack of Patience
How many times has the power of slow and steady progress become imminently clear? Slow and steady usually comes out on top – be it at the gym, in school or in your career. Why, then, do we expect it to be different with investing? A slow, steady and disciplined approach will go a lot farther over the long haul than going for the “Hail Mary” last-minute plays. Expecting our portfolios to do something other than what they’re designed to do is a recipe for disaster. This means you need to keep your expectations realistic in regard to the length, time and growth that each stock will encounter.
4. Too Much Investment Turnover
Turnover, or jumping in and out of positions, is another return killer. Unless you’re an institutional investor with the benefit of low commission rates, the transaction costs can eat you alive – not to mention the short-term tax rates and the opportunity cost of missing out on the long-term gains of good investments.
5. Market Timing
Market timing, turnover’s evil cousin, also kills returns. Successfully timing the market is extremely difficult to do. Even institutional investors often fail to do it successfully. A well-known study, “Determinants Of Portfolio Performance” (Financial Analysts Journal, 1986), conducted by Gary P. Brinson, L. Randolph Hood and Gilbert Beerbower covered American pension-fund returns. This study showed that, on average, nearly 94% of the variation of returns over time was explained by the investment policy decision. In layman’s terms, this indicates that, normally, most of a portfolio’s return can be explained by the asset allocation decisions you make, not by timing or even security selection.
6. Waiting to Get Even
Getting even is just another way to ensure you lose any profit you might have made. This means you are waiting to sell a loser until it gets back to its original cost basis. Behavioral finance calls this a “cognitive error.” By failing to realize a loss, investors are actually losing in two ways: first, they avoid selling a loser, which may continue to slide until it’s worthless. Also, there’s the opportunity cost of what may be a better use for those investment dollars.
7. Failing to Diversify
In building your portfolio, remember to allocate an exposure to different major markets/currencies (USA, UK , Japan , Europe , Emerging markets,…etc. ) and different industries ( Technology , Healthcare , Utilities…etc.) at different time by purchasing gradually.
8. Letting Your Emotions Rule the Process
Perhaps the No.1 killer of investment return is your emotions. The axiom that fear and greed rule the market is true. Do not let fear or greed overtake you. Focus on the bigger picture. Stock market returns may deviate wildly over a shorter time frame, but over the long term, historical returns for large cap stocks can average 10 to 11%. Realize that, over a long time horizon, your portfolio’s returns should not deviate much from those averages. In fact, you may benefit from the irrational decisions of other investors.
9. Day trading
If you insist on becoming an active trader, think twice before day trading. Day trading is a dangerous game and should be attempted only by the most seasoned investors. In addition to investment savvy, a successful day trader needs access to special equipment that is rarely available to the average trader. Did you know that the average day-trading workstation (with software) can cost in the range of $50,000? You’ll also need a similar amount of trading money to maintain an efficient day trading strategy.
The need for speed is the main reason you can’t start day trading with simply the extra $5,000 in your bank account: online brokers do not have systems fast enough to service the true day trader, so quite literally the difference of pennies per share can make the difference between a profitable and losing trade. In fact, day trading is deemed such a difficult endeavor that most brokerages who offer day trading accounts require investors to take formal trading courses.
Unless you have the expertise, equipment and access to speedy order execution, think twice before day trading. If you aren’t particularly adept at dealing with risk and stress, there are much better options for an investor looking to build wealth.
10. Buying Stocks that Appear Cheap
This is a very common mistake, and those who commit it do so by comparing the current share price with the 52-week high of the stock. Many people using this gauge assume that a fallen share price represents a good buy. But the fact that a company’s share price happened to be 30% higher last year will not help it earn more money this year. That’s why it pays to analyze why a stock has fallen.
Deteriorating fundamentals, a CEO resignation and increased competition are all possible reasons for the lower stock price – but they are also provide good reasons to suspect that the stock might not increase anytime soon. A company may be worth less now for fundamental reasons. It is important always to have a critical eye since a low share price might be a false buy signal.
Avoid buying stocks that simply look like a bargain. In many instances, there is a strong fundamental reason for a price decline. Do your homework and analyze a stock’s outlook before you invest in it. You want to invest in companies which will experience sustained growth in the future.
What You Can Do to Avoid these Mistakes
My article “6 REASONS WHY MY PORTFOLIO IS UP OVER 25% IN 2017” explains the steps I followed to carefully avoid these 10 common mistakes.
“Wealth Store” e-book summarizes my 20+ years of investment experience in Stocks , Properties , Bonds and Gold across 6 countries (USA , UK, UAE, Australia , Switzerland , Egypt). These simple 5 steps enabled me and people who rigorously followed them to turn little amount of money invested consistently every month into great wealth.