22Most CommonMistakes YouMust AvoidWhen Investingin Stocks!
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Most Common MistakesYou Must Avoid When Investing in Stocks!
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Mistake No. 1
1
Investing the Wrong Money!
Don't ever invest in stocks the money you cannot a�ord to lose, and never, never, never buy stocks on credit!
Investing based on credit line means ‘leverage’ - a �nancial term you have probably heard often through the last �nancial crisis. Your investments may not go in the right direction, but your high interest rate debt stays with you, making it harder and harder to pay o�. That's reverse investing!
If you do not respect this rule, you won't even have a chance to make other mistakes.
No.1
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Most Common MistakesYou Must Avoid When Investing in Stocks!
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Mistake No. 2
2
Don't Ever Forget That Investing Involves Risk!
Investing is a risky business and there is a high possibility that an individual position can drop signi�cantly.
If stocks only rose all the time, wouldn't we all become billionaires?
Hopefully most of your trades will be pro�table, but for sure you will also close some of your positions with loss, some of them might even be hit in positive or negative way by unexpected events.
Remember! Even if you get 3 out of 10 positions right, you can be a successful investor, if you let the pro�ts run and successfully cut the losses.
No.2
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Mistake No. 3
3
Low Priced Stock Does Not Mean the Stock Is Actually Cheap!
A company with a $0.5 stock can actually be more expensive than a $450 stock.
A stock could be priced low because there are so many shares outstanding that each share represents an extremely tiny piece of the company.
When evaluating stocks, you always have to compare stock price to some other company data, like earnings, book value, etc.
Think in relative terms and ratios instead in absolute terms!
No.3
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Most Common MistakesYou Must Avoid When Investing in Stocks!
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Mistake No. 4
4
Overconfidence!
In recent years, a group of behavioral psychologists and �nancial economists have created the important new �eld of behavioral �nance.
Their research shows that we are not always rational. We tend to be overcon�dent!
If we do make a successful investment, we confuse luck with skill. It was easy in early 2000 to delude yourself that you were an investment genius when your Internet stock doubled and then doubled again.
A patient buy-and-hold investor who holds a diversi�ed portfolio through thick and thin is the investor most likely to achieve his long-term goals.
No.4
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Mistake No. 5
5
Don't Average Down on Losing Positions!
There are instances where this could work but for the most part, it leads to additional losses.
Be aware, that a stock may decline because investors have priced in declining sales, declining pro�ts or the risk of bankruptcy into the stock price. Try to think of your current position independently, as if you were not holding it at the moment. Regularly ask yourself a simple question: "Would you buy the same stock now?" and be very honest with your answer. If you do not see any fundamental or technical reason for holding the stock anymore, sell it and move on.
Do not average down the same stock bybuying more when it is cheaper. There is probably a very good reason, why it is becoming cheaper.
No.5
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Most Common MistakesYou Must Avoid When Investing in Stocks!
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Mistake No. 6
6
Paying Too Much in Fees!
There is one piece of investment advice that, if you follow it, can dependably increase your returns: Minimize your investment costs.
The higher the fees you pay, the lower your return. This is true for any kind of investment classes.
If you are buying shares, focus on your broker's transactions costs and cost of running the account; if you are a fund investor, compare their management fees and other related costs.
Be especially aware of recurring costs (monthly, quarterly, yearly); they are far more important on the long term than one time entrance/exit costs, even if on the �rst look the latter can be much higher in absolute terms.
No.6
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Mistake No. 7
7
It's Not Everything about Analysis and Valuation!
Don't ever forget, that markets and prices are driven as much by psychology as by valuations.
If markets were only driven by valuation we could all just invest in index funds, checking our portfolios once a year. Investing in stocks is a very complex game, full of emotions, and the whole world is playing it at the same time at the same place.Some compare it to playing chess; I would say it is even more sophisticated, with more players and more possible outcomes.
That is why you have to get some experience to play it well and become constantly successful.
No.7
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Mistake No. 8
8
Committing All Your Capital at Once!
A huge mistake that many investors make is that when they �nally decide to invest in the stock market, they do it with all the money they have managed to save in their whole lifes at once.
This is not a wise thing to do, since markets �uctuate up and down throughout the year, what if you end up buying the very top? It's much better to plan ahead, and spread your capital commitment over many purchases over one year or even longer (cost averaging strategy).
No.8
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Mistake No. 9
9
Over- Or Under-Diversifying!
Every investor today is aware of importance of diversi�cation and that you shouldn't keep all your eggs in one basket. But in practice, many people are doing more damage than good in their e�orts to diversify, simply because they go too far or not far enough. If all your eggs are in two or three baskets, you're exposed to too much risk. If you have too many baskets to count, then you probably aren't able to keep up with each company, each of those companies will have a tiny impact on your portfolio while the brokerage fees and other transaction costs may even exceed the pro�t from your investments. Between eight and 15 stocks is a manageable number for most people, although some do well with a few more or less. Consider investing in ETFs, which are made up of many companies; this way you will achieve su�cient diversi�cation and mimic the overall market with low cost.
No.9
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Most Common MistakesYou Must Avoid When Investing in Stocks!
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Mistake No. 10
10
You Have To Do Your Homework and Not Just Rely on Market Talks!
Using investing advice and tips from friends, family and free internet websites, without doing any of your own research and analysis, is more like playing a lottery.
Investing is a lot of hard work and a time consuming activity. Unless you trust someone's investing capabilities and are paying them to do it for you, be prepared to do your own digging and don't depend on what someone else tells you.
You will also have to learn to distinct scams and frauds from real investing tips.
No.10
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Mistake No. 11
11
Not Accounting for Time Horizon!
The type of asset in which you invest should be chosen based upon your time frame. Regardless of your age, if you have capital that you will need in a short period of time (one or two years, for example), you should not invest that money in the stock market or equity based mutual funds. Although these types of investments o�er the greatest chance for long-term wealth building, they could experience high short-term volatility that can wipe out your holdings if you are forced to liquidate.
Likewise, if your horizon is greater than ten years, it makes no sense for you to invest a majority of your funds in bonds or �xed income investments unless you believe the stock market is grossly overvalued.
No.11
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Most Common MistakesYou Must Avoid When Investing in Stocks!
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Mistake No. 12
12
Greed!
Don't be too greedy and wait with investing in high growth emerging technology until you get some experience!
Investing too early in an emerging technology like solar technology, can easily see your portfolio wiped out if you have concentrated positions.
Consider starting with value and income investing strategies �rst, where volatility is lower, and add growth stocks later, when you aremore experienced and able to handle di�cult investing situations with cooler head.
No.12
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Most Common MistakesYou Must Avoid When Investing in Stocks!
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Mistake No. 13
13
Too Frequent Trading!
Do you know anyone who is really successful in trading?
When you invest in shares, you are a part-owner of a business; as the company prospers, so do you. The investor takes the time to select a great company and after that, he has to do nothing more than sit back, develop a dollar cost averaging plan, enroll in the dividend reinvestment program and live his life. Daily quotations are of no interest to him because he has no desire to sell. Over time the value of his shares appreciates.
A trader, on the other hand, is one who buys a company because he expects the stock to jump in price, at which point he will quickly dump it and move on to his next target. Trading is not tied to the economics of a company, but rather chance and human emotion. 95% of traders lose money, because they lack su�cient risk management strategies.
No.13
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Mistake No. 14
14
Don't Let the Tax Reason Stop You From Otherwise Selling Position!
There are di�erent tax regimes in countries all over the world, but in the most of developed world there is similar legislation regarding capital gain tax: if you are trading in a taxable account, you pay higher short-term speculative taxes on positions you sell less than a year after you buy them; if you hold the position for more than a year, you would pay the lower long-term tax rate.
Many investors tend to hold on to positions longer then they should, just because of tax reasons. While this works well with some positions, for the most part, selling when you believe the stock is fully valued or overvalued is a good idea.
No.14
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Mistake No. 15
15
Fear Based Decisions, Selling Winners and Keeping Losers!
The costliest mistakes are usually fear based. Many investors do their research, select a great company, and when the market suddenly drops for whatever reason, they dump their stocks for fear of losing money. With such behavior you will keep losing your money.
The company is the same company as it was before the market fell, only now it is selling for a cheaper price. Common sense would dictate that you would purchase more at these lower levels.
A typical sign of fear based trade and a very common weakness of many investors is also selling a position too early, just to protect the gains. The simple formula of "buy low/sell high" has been around forever; it is sad, that only a handful of investors do it in practice.
No.15
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Mistake No. 16
16
Your Investment StrategyShouldn't Be Too Rigid!
They say a trader is only as good as his last trade.
Markets, sectors and businesses constantly change and you have to adapt quickly to stay ahead.
What worked in a bull market will most likely not work in a bear market and hence relying on a single technique or strategy through di�erent market conditions is a big mistake.
While it is important to retain some of your core beliefs, it is equally important to tweak your approach based on the input you are receiving from the market and the real world.
Adapt quickly to changing business environment and stay ahead!
No.16
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Mistake No. 17
17
Keeping a Portfolio of Individual Stocks When You Can’t Monitor Them!
If you own a portfolio of individual stocks, you're taking on two kinds of risk.
One is the overall market risk (systemic risk) and the other is the risk associated with a particular stock and the underlying company (unsystematic risk).
Regardless of the dollar amount in your portfolio, making good stock picks requires keeping track of individual companies, their industries and overall economic trends.
Before investing, ask yourself whether you have the time and expertise to do that on your own.
If not, check out alternatives, professional fund managers or consider passive investment strategy with Exchange Traded Funds (ETF).
No.17
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Mistake No. 18
18
Stay With Investment Products and Companies You Know Well!
In today's innovative �nancial industry there are many new �nancial instruments (derivatives), which are very complex to understand for average investor.
Instead, the promoters of such instruments spend huge budgets for e�ective marketing of these products, resulting in people buying investment products that they do not understand and do not �t in their trading pro�le; investors often see the pro�ts, but overlook the potential risks.
The same problem is with investing in companies and not knowing at least basics of how the company, the sector and the industry operate.
No.18
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Mistake No. 19
19
Following the Herd!
Investors tend to get more and more optimistic, and unknowingly take greater and greater risks during bull markets and periods of euphoria.
That is why speculative bubbles feed on themselves. But any investment that has become a widespread topic of conversation among friends or has been hyped by the media is very likely to be unsuccessful.
Following the herd in believing that "this time it's di�erent" has led people to make some of the worst investment mistakes throughout history.
No.19
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Mistake No. 20
20
Timing the Market!
Does timing the market in�uence your returns?
You bet it does and the problem is, that for majority of investors it is only lowering the overall return. The stock market as a whole has delivered an average rate of return of 9.6% over long periods of time.
But that return measures only what a buy-and-hold investor would earn by putting money in at the start of the period and keeping his money invested through thick and thin.
The average investor's actual returns are at least two percentage points lower because the money tends to come in at or near the top and out at or near the bottom.
No.20
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Mistake No. 21
21
Investing in the Company You Work For!
Investing in the company you work for is a dangerous thing to do; employees are often encouraged by their own employers to invest in company shares.
Sometimes they even invest all their lifetime savings!
The danger is that if the company goes bust, you will lose both your job and your investment!
No.21
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Mistake No. 22
22
Don't Give Up Too Soon!
The most critical mistake an investor who is just starting out can make is giving up on investing altogether after taking a hard (but not critical) hit. There is a good possibility that your portfolio will not su�er a big drop with adequate risk management, but even then a fat tail risks tend to occur more often than people expect.
On the other hand, always have in your mind that the opportunity cost of staying out of stock investments can be much higher than staying invested and taking an occasional hit.
No.22
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Goran Dolenc is part of the Stocks-For-Beginners.com Team.He comes directly from the brokerage industry and has over 10 years of investing, trading and research experience in different asset classes. He has tried everything, from scalping and day trading, to swing-trading and long-term investing. He has traded stocks, bonds, Forex, Options, commodities and other derivatives around the globe, from NYSE, Nasdaq, London, Frankfurt, South and Eastern Europe, etc.
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