Published on October 17th, 2017
This is a guest contribution by Kevin Monk. Kevin is a Financial Advisor with a great interest in budget planning and organizing. He is also the founder of the website Retire By 37, where you can find advice on better evaluating yourself, find your most valuable qualities and work on them in order to improve your financial status and not only.
Investing in stocks, or any financial instrument for that matter, requires a high level of understanding and self-discipline that takes time to learn and master. If one is to consistently extract profits from the financial market of his/her choosing, identifying the mistakes that befall both novice and even skilled investors is paramount. You can avoid a lot of headaches and huge financial losses by remembering and abstaining from these harmful investment habits.
Mistake #1: Only Planning for the Short Term
The most successful investors have the ability to see beyond the first few days or weeks and look into how a particular stock or market will behave in the next year or two. This allows them to plant themselves firmly in assets that will accrue in both capital gains and dividend yield over the long run. To gain a big picture view of a stock or market you’re interested in, pull up a daily price chart and observe the current pattern that’s unfolding.
Mistake #2: Keep Losing Positions Running
Mike Patton, a Forbes contributor and investment analyst, has heard this story dozens of times. And while it’s from different people and cases, the mistake attributing to such heavy losses is the same – failure to close a losing position. When people buy a stock and it closes an X number of percentage points against them, a common reaction is to wait for the stock to bounce back. Unfortunately, being hopeful and having faith in that losing position almost always never works out in the investing realm. Avoid this mistake by setting profit targets and, more importantly, stop losses before entering a position to protect your account from sharp price declines.
Mistake #3: Being Trigger Happy
Impatience and fear of missing out or FOMO as abbreviated in a lot of self-help investment articles are what leads investors to get in on a position without any or sufficient reasoning. It’s what forces investors, especially inexperienced ones, to abandon their technical analysis and strategies prematurely. And while it may lead to one or two winning positions, over time, it can expose your investment portfolio to high risks.
Mistake #4: Emphasizing Too Greatly on Past Returns
When choosing your next investment, don’t just rely solely on past market patterns and information. Just because you bought a tech stock in the past that produced a return, it doesn’t mean buying one now or buying the same tech stock today can yield the same result. The same goes when choosing mutual funds to invest in. While historical data helps put some degree of reasoning and logic to current market action, it isn’t completely indicative of what the future holds.
Mistake #5: Starting with Too Small of an Account
You’ll find a lot of ads today saying how you can invest with just $50 in your account. And while it’s technically true that you can invest with that measly amount of money, it’s ill-advised and, frankly, wasteful. Roundtrip stock trades cost around $5 to $15, which leaves you just a few dollars to actually buy the stock you want. Save for a decently sized account or launch a campaign on a cloudsourcing platform to get the cash you need to start investing.
Mistake #6: Acting on water Cooler Recommendations
Just because a fellow investor or a friend tells you that company XYZ is a good buy right now, that doesn’t mean you should go right ahead and buy a couple dozen stocks based on that advice, at least not until you’ve actually done some research yourself. Nowadays, this is becoming an increasingly prevalent mistake thanks to the expanding reach and impact of social media content. Although investing content and advice you read online and hear outside are good ways to gain different angles on potential investment opportunities, always back your positions up with your own set of data points and research.
Mistake #7: Overlooking the Power of Dividends
While S&P 500’s stock dividend yield rose only by a mere five percent in the past year, dividend stocks remain a powerful generator of steady income from your investment portfolio. Unfortunately, many investors overlook the financial gains to be made from picking the right dividend-yielding stocks. They would much rather pick the “hottest” tech startups or the cheapest penny stocks that could jump hundreds of percentage points in a day. A co-manager at BlackRock Equity Dividend Fund, Tony DeSpirito, says that the concept of receiving dividends from stocks remain intact.
Mistake #8: Plateauing as an Investor
Stagnating as an investor is different from maintaining a set of core principles that guide your investing decisions. Stagnating is failure to realize the advantages of using more advanced tools or failure to adapt to changing markets because you simply don’t know that such changes are occurring. Invest in your financial education and know that reading books and attending investing seminars (and courses) can greatly impact your bottom-line as an investor.
Mistake #9: Overcomplicating Things
It’s a common mistake for rookies, but is something that skilled investors also find difficulty controlling. For many humans, making something more sophisticated increases its integrity and credibility. This is something that you should avoid when investing. Using too many parameters and indicators and overcomplicating the fundamentals of investing only lead to unnecessary stress and frustration over time. Stick to common sense and rational thinking and you’ll do better than 90 percent of stock investors who either break even or lose money throughout their careers.
Mistake #10: Averaging Down
Averaging down means buying more stock and adding more to your currently losing position at a lower price. In some ways, this makes practical sense since it allows you to get in at a better price point. Nevertheless, before buying more of a losing stock, one must first submit it to a sanity check and see if the underlying reasons for buying it in the first place are still intact.
These are only ten of the many mistakes and pitfalls that cause investors, both rookies and experts, to lose money in the markets. By fully understanding and genuinely acknowledging these mistakes, you are a step further to achieving consistent gains from your investment portfolio