Common Mistakes to Avoid
In your investment lifetime, you will make mistakes. Everyone does, from the best in the business to the newest retail investors. However, the true mistake is beating yourself down instead of learning from your mistakes.
A key to investing is analyzing your mistakes, correcting them to minimize losses and learning from them to avoid similar future situations.
Throughout this course, we have talked about the importance of following a plan with your long-term goals in the bullseye.
Over time, most investors that follow a plan are likely to see some positive returns. However, not all your investing ideas will be winners, sometimes you will get losers. It is OK.
In order to help you avoid some of the most common mistakes, we provide you with the following list:
Waiting too long to get started
“I don’t have enough money,” “I don’t know enough about investing,” “I don’t trust it,” or “I don’t know what to invest in.”
The above are some of the things people tell themselves to explain why they haven’t started investing.
Nowadays, it is easier than ever to start investing.
- You need a very small amount of money (as little as $5 or even less), as many brokers have no fees or account minimums. You can own parts of shares. So, for instance, you can invest $5 in Microsoft, which costs $200/share, and you will own 2.5% of one share.
- There is a lot of information available, you can learn everything about investing with a few clicks and very cheap.
- Most brokers are registered with government entities and ensure your capital up to a few hundreds of thousands.
- If you don’t know what to invest in, you should start by investing in broad ETFs that diversify your money across a wide range of assets.
We have seen many of the benefits of investing in this course, such as long-term growth, goal achievement, gaining purchasing power, financial well-being, etc.
Start as soon as possible! Don’t put it off!
Investing too little when you have the means
How much to invest should be an important part of your investment plan. Many starting investors put a little bit of money to try it out and then are too afraid to invest more.
Your investment capital should increase as your means increase. This is critical if you want to achieve your long-term goals and objectives. For instance, a college graduate with no job may not be able to invest much, say she starts at $100. However, when she gets a stable job (which pays $2,000 a month) and starts growing her savings, she should start investing a more relevant portion of her savings, such as $200 a month.
Create a plan and stick to it. If you decide that you can invest 10%-15% of your weekly salary, do it and be consistent.
Investing too much when you don’t have the means
Now we will flip it over to the opposite side of the coin. This may be a bigger reason why having a plan is so important. Investing too much or even investing money that you don’t have is a big no-no when getting started.
Brokers offer ways for investors to borrow money to invest (investing on margin). For experienced investors, this can be a useful tool to maximize returns. However, it is a really dangerous weapon in the wrong hands. If you are not very experienced, you should not invest with money that you don’t have because you run the risk of losing a lot more than you may be able to handle.
You should invest an amount that you are comfortable with depending on your situation. and, by all means, do not invest money that you may need in the next six months or year.
Invest what you can afford to risk! No more.
Investing based on emotions
Investor behavior has been a matter of countless studies for decades. Many people try to explain why most investors overreact in certain market situations.
Like in any other aspect of our lives, sometimes we act based on our emotions and not so much based on rational thinking during times of stress (either good times or bad times).
Buying too late
When things are going well in the market, many investors tend to get greedy and think the bull market will go on forever. So they make emotional decisions and buy anything they find when markets are too high with very little to no research.
Selling too soon
On the other side of the coin, when the markets get some negative volatility (when a downturn develops), many investors get scared, they panic and start selling because they are afraid of what’s happening and don’t want to lose more. In reality, selling when the market is down is the only way to realize actual losses. If you keep your investments and wait out the bad weather, you may not actually suffer any losses.
At the end of 2007, the markets were reaching new highest values almost on a daily basis, completely disregarding some signs of a possible downturn. Many people got greedy and invested at very high prices thinking the bull market would go on forever. But then, it all came crashing down, forming one of the worst recessions in history. That’s when a lot of people got scared and started selling all their assets, ultimately realizing losses of over 50%.
Instead, if they hadn’t gotten carried away by their emotions and continued investing throughout the crisis, they would have recouped their losses and grown their investments even more.
Investing (both buying and selling) requires prior analysis in order to make rational decisions and to not get carried away by emotions. Therefore, having a plan in place and not deviating from it will help you get rid of emotional investing.
Be patient, analytical, and rational when investing.
Investing by following the crowd
From time to time, you may find an article or an ad about a certain stock that has been performing extremely well lately, it seems like this stock is “hot” and everyone is talking about it. Unfortunately, when a stock is talked about so much and is perceived as “hot”, it may have reached its peak or be very close to it, which means it could be too late to buy it.
Buying a stock too late can be dangerous, as the market tends to correct itself. The price of that stock may decrease after an overreaction from investors that took the price way too high.
- You read in the news that stock XYZ almost doubled its value in less than a month. You keep reading stuff about how much it grew and talk to friends about it.
- Then, you decide to buy this “hot” stock. But, days later, the market realized it had overreacted and the price was too high, so people started selling and the stock price fell significantly in a matter of weeks.
- So, you start getting anxious and scared because you don’t want to lose it all, so you sell your stock for a huge loss.
- Lastly, the market realizes it overreacted again buy selling too much and corrects itself pushing the stock back up. And that’s when you regret getting scared and selling too soon.
Reading into the news too much and believing anything anyone says will probably not take you too far. Do your own research and invest with a long-term mindset, you will succeed.
In this section, we have covered some of the main mistakes investors make when getting started. Next, we will discover how to analyze a company.