Investment Mistakes. Which are the most common investing mistakes? Here they are, and how you can avoid investment mistakes like these.
Investing Mistake: Overconfidence
Many investors – especially those just starting out – are overconfident about their abilities. In January 2000, many novice investors thought they were geniuses who couldn’t fail – until their portfolios collapsed in disaster.
In amateur tennis, it is interesting to note that points are scored not by truly skilful play, but rather by mistakes on the part of your opponent. The same applies in investing – the stock market has gradually become a loser’s game as more and more novice investors get themselves burned in the market.
Investing Mistake: Going by the herd mentality
If everyone is buying, buy; if everyone is selling, sell. This is especially true in the midst of a speculative bubble. Especially when everyone seems to be boasting about the profits he is making, it is difficult for you to discipline yourself and believe in looking at the intrinsic value of the stock.
Yet, the contrarian view often works better. When even the local milkman is offering stock tips, that’s the time when you should be careful and look towards starting to sell. When everyone is complaining about being burned by the market, that’s when the true bargains are starting to emerge.
The herd mentality is responsible for much of the precipitous rises and much of the precipitous declines – the Asian Financial Crisis, the 2000 dot com bubble. The crowd doesn’t know best; you know best.
Investing Mistake: Hot Tip Investing
Hot tip investing is actually no different from herd investing. The pundits say it is right, so it must be right. Always make the investment decision yourself – rationally decide if the company is truly a bargain; these hot tips are likely to become their worst investments in your life.
Investing Mistake: Trying to beat the market
Unfortunately, the random walk theory tends to hold true long enough to make you broke. Price changes in the future can often be almost entirely unrelated to price changes in the past.
Investing Mistake: Loss aversion
Most investors have an inverted investment mentality. They cut their gains short and run their losses long. This mentality derives from the basic tendency to avoid losses. Whenever a stock moves against them, investors tend to want to avoid realizing their mistakes, and resort to the ‘buy and pray’ approach to investments. They pray and hope that the stock will soon rise in value again so they can recoup their losses.
Conversely, many investors do not hesitate to cut their gains short, as even a small gain would make them ‘right’. They would have made the right decision since they would make a profit, no better how small.
Unfortunately, to make money from the stock market, you need to reverse this natural tendency: instead seek to cut losses once they have reached a certain point, and let your profits go long as far as possible.
Investing Mistake: Forgetting costs
Do note that the higher the costs, the lower your returns. This is a financial truth that will always hold true.
Thus, your top priority should always be to shop for the most cost-effective financial products that you can secure, regardless of whether it is insurance, mortgage or broker commissions.
Top Ten Investment Mistakes
Seven Deadly Sins of Investing
In addition to the common investment mistakes noted above, here’s a short summary of the Seven Deadly Sins of Investing, a book by Maury Fertig:
Envy – do not judge your own success by that of others, do not resent the success of others
Vanity/Pride – do not be overconfident; your wife may actually give you very sound investment advice; women are less likely to be overconfident than men.
Lust – Do not fall for investments that seem overwhelmingly attractive. Those that are overly hyped up in the media may sometimes make no sense when you actually research the numbers.
Greed – Do not cling on to your illusions. If an investment has tanked, admit the mistake and move on. Make sure your decisions are made based on rational reasons, and not on your emotions.
Anger or Wrath – Do not make irrational moves for no reason, sacrificing long-term growth in order to get a ‘quick hit’. Sometimes, investors react with frustration to short-term changes in the market, forgetting the reasons why they invested in the first place.
Gluttony – Do know your limits; do not spend all of your investment profits away immediately on new stocks without reason. The stock market is only one of many investment vehicles, and certainly not the single investment vehicle you should rely on exclusively.
Sloth – Do not be lazy about managing your finances and securing your financial future; you cannot afford to!
Avoid investment mistakes like these, and you will already be in the top 1% of all investors. The hard part is making sure that you abide fully by these investment rules.