Even investment legends like Warren Buffet and Michael Bloomberg, who now hold court as the kings of Forbes’ “The World’s 500 Richest People” List, had to start somewhere. They too entered the investing game at the starting line just like everyone else, with minimal trading knowledge and a steep learning curve. The fact is that investing is not something that can be learned overnight. It is developed over time and requires you to continually hone your skills through constant learning and just plain getting your hands dirty. Each and every investor, even those on Business Insider’s “The 30 Richest Investors in the World,” all have made mistakes, but what separates them from the rest is that they have the tenacity and determination to fail, but then immediately get back up, identify where they went wrong, make some tweaks to their approach, and then get back in the game.
In an effort to help remove some pain from your learning curve, I’ve pulled together the top 10 errors that tend to trip up the average investor.
1. Obsessing Over Daily Stock Movements
The web has put some powerful tools in the hands of average investors. The problem is that real-time information and portfolio performance tracking can result in an emotional roller-coaster. Many investors find themselves staring at their portfolio dashboard, clicking the refresh button every 30 seconds, constantly worrying about the latest price movements. A lesson from Warren Buffet himself,
Some investors claim that you should only buy something you’d be perfectly happy to hold if the market shuts down for 10 years.
The point is that you shouldn’t fret about daily price movements unless you’re a day trader that buys and sells based on small fluctuations in the market. But the fact is, you are an “investor” not a “trader”, which take me to the next mistake….
2. Focusing Too Much on Short-Term vs. Long-Term Results
Time is money, so it is only natural for investors to want to see results right away. This short-term mindset, however, will set you up for large disappointments. It takes time for good companies to grow, so you need to give the management team a chance to make things happen. If you’re looking for a quick win, then you’re going to end up risking a lot on “guesses” because the fast money that comes with the right choice can just as easily go the other way on you. However, taking a step back to embrace the concept of long-term results will have you evaluating companies thoroughly and logically. Another important thing to consider when it comes to short-term investment horizons are the trading charges and taxes that can pile up in the process, bringing us to mistake #3.
3. Lack of Knowledge of Trading Fees and Taxes
One of the most common mistakes investors tend to make has nothing to do with the companies they choose to invest in. Instead, it comes down to knowing what fees you are being charged and how much Uncle Sam is going to claim at the end of the day. Each trade you make, whether a buy or a sell, carries at minimum a commission cost from your broker. (Note: some brokers also tack on various other service charges for things like stock delivery, postage fees, etc., so check your broker’s commissions and fees page to find out what they’re charging for.) Depending on how much money you have invested, the commission cost can make a big difference between a winning trade and a losing one (e.g. making money versus not).
On top of that, you have to consider the impact of taxes, which can vary greatly depending on how long you’ve held a stock and what tax bracket you are in (see more here). Knowing the tax impact of your trading decisions can mean the difference of thousands of dollars going in your pocket or heading over to the government. But you also don’t want to find yourself making mistake #4 where you completely on the sidelines.
4. Failing to Update Your Online Portfolio
In contrast to investors who are completely engrossed in their portfolio, insufficiently checking up on it and ignoring it altogether is also a common issue among investors. Abandoned portfolios can end up running amuck as companies that were once primed for long-term success hit bumps in the road associated from management changes, new competition, regulatory restrictions, among other things. Investments need to be rebalanced routinely to ensure they still fit within your plan. Having a plan seems obvious, but you’d be surprised by how many investors just dive into the markets and end up making mistake #5.
5. Investing Without a Plan
One of the most important parts of diving into the world of investing is having a plan. Entering blindly will have you drowning in numbers and irrationally bouncing from one investment to the next. Investors without plans have a higher chance of making impulse decisions that more often than not have a detrimental impact on you actually achieving your investment goals. Having a plan based on your investment experience, time horizon, risk tolerance, and objectives can also make it much easier when it comes to choosing investments because you can narrow your choices down to a more manageable set of investments that meet your needs. However, even with a plan, money can do some crazy things with our emotions, leading us to mistake #6.
6. Falling Victim to Emotional Investing
Investors who allow their emotions to take over when buying and selling securities more often than not find themselves overly attached to bad investments. As soon as you let the adrenaline get the best of you, you’ve inherently lost control of your decision-making. This, in turn, leads to periods of self-doubt, second-guessing, and irrational investing behavior. It is easy to fall victim to this, especially when it comes to stocks that have found themselves on the south side of your initial purchase price. For some reason, we always believe that it’ll come back if we just hang on, but the fact is that sometimes we have to admit defeat and cut our losses. To help avoid this endless cycle, it’s a good practice to not only set time horizons for your investments, but also profit and loss targets when adding a stock to your portfolio. Doing so, will not only help you stay off the emotional roller-coaster, but may also help you avoid mistake #7.
7. Cutting Winners Short and Letting Losers Run
This common investor mistake is fundamentally rooted in human nature. At heart, we are not optimists or pessimists, but pragmatists. We believe that things are either too good to be true or can’t possibly get any worse. That said, a high flying stock goes on a rally, and we find ourselves trying to time the market before it “inevitably” falls, while we hang on to a sinking stock because we couldn’t imagine it falling any further. As I mentioned earlier, you can avoid this mistake by setting proper expectations when you first invest, and then re-evaluating those investments on a periodic basis to ensure that the fundamental situation has not changed. At the same time, you have to be careful not to fall into the trap of mistake #8.
8. Showing Up Late to the Party
“Imitation is the sincerest form of flattery.” People have a tendency to follow trends, causing a herd effect. The problem is that most people aren’t early adopters and instead buy into a trend once it’s become mainstream. This leave most investors buying shares of companies that are at their peak and selling them when they’re at the bottom. This is a quick way to lose your capital. A way to avoid this mistake is to avoid fads or media hysteria around a company, and instead focus on the fundamentals of a company. If you don’t know how to analyze a company properly, then your best bet is to seek out guidance from someone who does. These are inherently the “hipsters” of the investing community. Just make sure you know what you’re analyzing so you don’t find yourself making mistake #9.
9. Comparing Apples to Oranges
There are a number of financial metrics and ratios that help people decide which companies are over or under-valued. The problem is that many investors find themselves comparing the metrics of the wrong two companies. The P/E ratio of one company has little bearing on that of a company in a different industry. In order to make best use of data, it’s important to ensure you’re choosing the proper benchmarks for comparison.
10. Dwelling on Mistakes
We’ve covered a lot of territory here, and you hopefully have a much better grasp of investor problem areas. However, I’d like to leave you with one more word of advice because this is the most important mistake of all: don’t let your mistakes get the best of you! As an investor, you need to have a very short-term memory, so you can forget your mistakes and move on. There is not an investor out there that bats 1.000 when picking stocks. Each and every one of us has some “oopsies” that have hijacked our performance. The only way to move past them is to accept them for what they are: a valuable learning experience. The key is just making sure you don’t fall into the same trap again!
Have any bad experiences to share? Leave a comment below, so that other investors like yourself can try to avoid making the same mistakes. Or if you have any good experiences, share your tips in the comments below!
Still hungry for more best practices on how to invest wisely, check out SprinkleBit University, where you can delve into 24 free chapters of investment content that is sure to broaden your investment knowledge even further. Or, if you want to learn by doing, join the SprinkleBit community, where you can get your questions answered by experienced investors and trade risk-free in the virtual stock market simulator (where your mistakes can’t really hurt you).
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