Be Patient
One of the most costly emotions is impatience. Remember that stocks are shares in a particular business businesses operate much more slowly than most of us would typically like to see, or even than most of us would expect.When management comes up with a new strategy, it may take many months, if not several years, for that new approach to start playing out. Too often investors will buy shares of the stock , and then immediately expect the shares to act in their best interest.This completely ignores the much more realistic timeline under which companies operate. In general, stocks will take much longer to make the moves that you are hoping for or anticipating. When people first get involved with shares of the company, they must not let impatience get the best of them… or their wallet!
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Averaging Down
Averaging down is typically used by investors who have made a mistake already, and they need to cover over their error. For example, if they bought the stock at $3.50, and it drops to $1.75, they can make that mistake look a little bit less awful by purchasing a whole bunch more shares at this new, lower price.
The result is that now they've bought stock at $3.50, and more at $1.75, so their average price per share is much lower. This makes their loss on the stock appear far smaller.
However, what is really happening is that the individual bought a stock which dropped in value, and now they are sinking even more money into this losing trade. This is why some analysts suggest that averaging down is just throwing good money after bad.
Averaging down is typically used as a crutch to help investors cover the mistake they have already made.
Lack of Investing Goals and a Way to Reach Them
An important Investing Mistakes to avoid. You need to articulate your investment goals and employ the best financial tools to reach them. If retirement is way over the horizon, your investment plan needs to include both shore and long-range goals.
Moreover, if you write out your goals answering questions like why, how much, how long, and how risky, you are on the road to a plan. The plan could be as modest as saving up for a $25,000 car or as ambitious as a million-dollar retirement fund. The important thing is to plan.
Stop Listening to the Hype
We all get those glitzy emails extolling the virtues of moving our money to “safe harbors.” Then there is the evening news where it seems the bottom is dropping out of the U.S. stock market because of some disaster or political event.
The fact is that the media tends to press the panic button and then move on to other news. Remember that the media feeds on sensationalism and the accompanying hype and fear. They are in business to keep their viewing public's attention glued to the falling sky.
The real world of investment planning lies somewhere between the high promises of “experts” and the doom and gloom of the latest news cycle. If you have a sensible and diversified investment plan, you should stay the course.
Stop Trusting the wrong people
Many new investors put too much faith in talking heads on financial TV programs or in hot stock tips offered by a friend or colleague. Anyone can recommend a stock, but you rarely really know the track record of the recommender -- and even a great investor will make some bad calls. Investors can also be fleeced by cold callers who interrupt an evening with an urgent appeal to put money into a one-of-a-kind, can't-lose investment, perhaps a company supposedly on the verge of curing cancer or striking gold or oil. Remember, anything that sounds too good to be true most likely is.
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You Might be paying Too Much in Commissions
Once you start actually investing, take care to not spend too much on trading commission rates, which are the fees your brokerage charges for each buy or sell order you place. Aim to pay no more than about 2% of the value of your trade in commissions. For example, if you were placing a $1,000 trade, you'd spend no more than $20 on commissions. Many good brokerages these days charge $7 or less per trade, so you can make relatively small trades and not exceed 2%.
A $7 commission rate would be 2% of a $350 trade. If you placed a $100 order, though, a $7 commission would represent 7%, and you'd need your investment to grow by a full 7% just to break even.
Are You diversified?
Not diversifying enough is another common investing blunder, and it's not necessarily addressed by you owning, say, 20 different stocks. If 10 of those are energy companies and 10 are manufacturing-focused companies, you're not that diversified. A sudden drop in the price of oil or gas could change the fortunes of half your portfolio, as could a recession that has manufacturers slowing down.
Aim to be invested in a range of industries -- and ideally, a range of countries, too. Go ahead and focus on U.S.-based stocks, but consider adding some international holdings, too -- or some big U.S. companies with sizable foreign operations.
Try not to time the market
Another common investing blunder is engaging in market timing -- getting in and out of the market based on whether you think it's heading up or down. This might seem reasonable, especially if you listen to the investing gurus who say they know where the market is headed in the near future. But identifying the best or worst days in advance is easier said than done, and guessing wrong can cost you. Researchers at Morningstar.com found that over the 20 years from 1992 to 2011, the market averaged 7.8% annually. If you were out of the market on the 10 worst days in that period, you'd have averaged 12%, while if you were out during the 10 best days, you'd have averaged 4.1%.
Index-fund pioneer John Bogle has quipped: "Sure, it'd be great to get out of stocks at the high and jump back in at the low, [but] in 55 years in the business, I not only have never met anybody who knew how to do it, I've never met anybody who had met anybody who knew how to do it."
Borrowing to invest'? Why?
Once you hear about investing with borrowed money -- i.e., using "margin" -- you may get excited at the prospect. Here's why it's exciting: Imagine that you invest $10,000 in a stock and it gains 50%, and now it's worth $15,000. Great, right? But what if you'd borrowed $10,000 and invested a total of $20,000 in the stock? Then you'd have $30,000!
Using margin is perfectly legal and can greatly amplify your gains -- but it can amplify your losses, too. In the example above, if the stock you borrowed money to buy falls by 50%, your $20,000 stake in it will be worth $10,000 -- the sum you borrowed. Once you pay it back, you'll be left with $0 -- meaning that 50% loss became a 100% loss, thanks to margin.
Also, the equity in your account is the collateral that you're putting up for the loan. If the value of your investments made on margin start falling significantly, you'll get a "margin call" from your broker asking you to sell some assets to generate cash or to deposit more cash into your account. If you fail to do so, the brokerage may just sell some of your holdings for you.
Meanwhile, brokerages charge you interest to use margin. At one major brokerage, for example, the recent rates ranged from 8.075% if you borrowed $250,000 to $499,999 to 9.825% if you borrowed less than $25,000. You'll need to earn quite a high return to make the borrowing worthwhile. Margin is best avoided, for most investors.
Inflation Is Real
Inflation is a real thing. Prices continue to go up and up and up and if you don't account for that down the road, you're going to find yourself in a real pickle eventually.
Don't make your target number match what you would need today. Include inflation in the equation. Assume that prices are going to go up (at least) 3% per year and thus you're going to need that much more to live on in retirement. Yes, it makes the hill a lot bigger, but you're better off shooting for the right number.
Start Now and Never Stop
Many people avoid retirement savings because of a fear of complexity or a desire to maximize their paychecks today. Some people choose to discontinue their retirement savings because they feel pressured by today's financial needs. The worst mistake you can make when saving for retirement is not starting at all; the second worst mistake is stopping your savings and not restarting it.
Control what you can
You can't personally change the ups and downs of the economy, but you can change your own day-to-day behavior. You can choose to spend less on unnecessary things, which gives you more money to invest toward the future.
The key is finding a good balance, and many people believe in a balance that is tilted too hard toward the present and away from their future needs.
Selling at the First Sign of Loss
If you're a newbie investor, you most likely aren't accustomed to seeing your investments lose value. The thing is, the market is cyclical thus bear and bull markets and therefore the “down years” are normal and inevitable, points out Rick Vazza, a CFA, CFP® and president of Driven Wealth Management “Despite the media's best efforts in reminding investors about the historical volatility of investing, the first taste of large losses can be hard to stomach for novice and seasoned investors alike,” says Vazza. “Developing a written investment plan will help new investors stick with their strategy through these periods of doubt.” Such a plan should include what you're saving for, your investment goals, budget, and time frame. You can also include your risk tolerance and comfort level with uncertainty.
In Summary
Mistakes are part of the investing process. Knowing what investing mistakes to avoid and when you're committing them,will help you succeed as an investor. To avoid committing the mistakes above, develop a thoughtful, systematic plan, and stick with it. If you must do something risky, set aside some fun money that you are fully prepared to lose. Follow these guidelines, and you will be well on your way to building a portfolio that will provide many happy returns over the long term.
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