Investing can be a scary subject, especially when you don’t know what you’re doing.
However, the worst investment mistake you can make is to not do anything in order to avoid those feelings of fear.
In this post, we’ll go over 11 of the most common mistakes that investors make and go into detail about how you can avoid them.
Not doing any research
Investing without doing any research is like gambling. You might get lucky and make some money, but chances are you will lose money as well.
Before investing in anything, you should always do your research: understand the risks, the opportunities, and the potential rewards. Or you will easily end up buying stocks that are overvalued, or choosing companies with poor management. A good place to start is here.
Not diversifying your investments
Diversification is key to reducing risk and maximizing returns.
Never make to mistake of putting all your eggs in one basket. Instead, spread your money across different asset classes, and across different investments within each asset class, and understand the correlation between them: the less correlated your investments, the more balanced your portfolio will be; this way, if one investment loses money, the other investments can offset those losses.
Investing too much money in a single company
Doing proper research one a specific company may lead you to really believe in that company’s future prospects. While it can be tempting to put all (or most) of your money into a single company, that is a trap to avoid – see diversification above.
Expecting profits every day
Many new investors enter the market with the expectation that they will make a profit every day. This is simply not realistic, and – you guessed it – is a mistake. The stock market is volatile and there will be days when the market goes down.
You need to be patient and it is important to have a long-term investment strategy in place.
Getting too caught up in the hype
There is always a lot of hype surrounding certain stocks, industries, or even entire economies. It can be tempting to get caught up in this hype and make investment decisions based on it.
The reality is that the fundamentals are often very different from the hype, and sooner or later the market will adjust on the basis of them. It is important to do your own research and not blindly follow the herd.
When the hype dies down, the prices of these assets usually follow suit. So, if you want to bet on “hot” names, do it with your eyes open: be sure to do your own research first and only invest an amount that you are comfortable with losing.
Failing to understand tax & fee implications
Investors often fail to understand the potential tax implications of their investment decisions. This can lead to significant problems down the road, especially if you are not properly prepared for them.
Similarly, for almost all investments there are transaction costs which can be substantial, in absolute terms or against the expected return from the investment. There are still many banks and brokers in the world that charge 1 or even 2 per cent to buy an asset on your behalf; and if the expected annual return is 4%, you may have just given up half of it for the first year.
Being too emotional with investments
One of the most common investment mistakes is letting emotions influence decisions. When the stock market is going up, it can be tempting to invest more money. However, when the market is going down, it is important to resist the urge to sell all of your stocks. Making rash decisions based on emotions and not on logic or reason can often lead to losses.
It is important to remember that investments are not personal and you should not let your emotions get in the way of making sound investment decisions. If you find that you are becoming too attached to an investment, it may be time to sell it and move on.
Following the crowd
Following the crowd is also an investment mistake. When everyone else is buying, you may feel like you need to buy too. When everyone else is selling, you may feel like you need to sell as well.
If you want to be a successful investor, you need to be willing to go against the crowd. This doesn’t mean that you should always do the opposite of what everyone else is doing. But it does mean that you should make your own decisions based on your own research and analysis.
Don’t let anyone else control your investment decisions. Think for yourself and make the best choices for your own portfolio.
Discussing investments with friends and co workers
When you discuss your investments with others, you are more likely to make impulsive decisions based on their opinions instead of doing your own research. Remember that everyone has different goals and risk tolerances: what may be a good investment for one person may not be right for you.
Mistaking luck for skill
Many investors believe that they are great stock pickers because they have made money in the past. However, this is often just luck.
In reality, most investors do not have the skills necessary to pick winning stocks. Without these skills, they are more likely to make mistakes that can cost them dearly.
Acting prematurely
Many investors tend to act prematurely when they see what seems to be an opportunity. They may buy a stock before doing proper research, or they may sell a stock too early without giving it time to grow.
Acting prematurely can be a costly investment mistake, as it can lead to buying stocks that are overvalued or selling stocks that have not reached their full potential. If you are considering making an investment, be sure to do your research and wait for the right time to act.
Conclusion
Investing can be fun, and incredibly remunerating. But no one is born with the appropriate knowledge, and every one must learn. There are infinite free sources of information where you can educate yourself (one of them, our blog!), so take your time and don’t make impulsive decisions.
And when you are ready to start, make sure to keep good track of your investments and their performances: we are here to help you do exactly that!
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