These mistakes have already happened to even the most experienced and smartest investor you know. Sometimes, you also commit them. Here are the most common investing mistakes that you should always try to avoid.
Investing in what you don’t understand
Warren Buffett, who is one of the world’s most successful investors in the world, warns against investing in businesses that you don’t understand. It means that you should not be buying stocks in firms if you’re not completely sure about their business models.
The best way to avoid this is to build a diversified portfolio of exchange-traded funds (ETFs) or mutual funds. If you do invest in individual stocks, make sure you thoroughly understand every company that those stocks represent before you invest.
Falling in Love with the Company
Too often, when we see a company we’ve invested in do well, it becomes easy for us to get attached and, in a way, in love with it and forget that we got the stock as an investment.
Always remember, you had gotten and bought this stock to make some money. if any of the fundamentals that prompted you to buy into the company change, you may have to consider selling the stock.
Slow and steady usually triumphs in different challenges. It’s basically the same when it comes to investing. A slow, steady, and disciplined approach will go a lot further over the longer term than going in for the last minute.
Expecting your portfolio to do something other than what they’re created for is one good way to enter broke-ville. This means that you need to keep your expectations realistic when it comes to the length, time, and growth that each stock will encounter.
Turnover or jumping in and out of positions is another thing that may kill your returns. Unless you’re an institutional investor with the benefit of low commission rates, the transaction costs can chip away from your money. You also incur short term tax rates and the opportunity cost of missing out on the long term gains of good investments.
Market timing can also kill your investments. Successfully timing the market is extremely difficult to do. Even institutional investors usually fail to do it successfully.
Waiting to Get Even
Getting even is another one-way ticket to losing any profit that you might have made. This means you are waiting to sell a loser until it gets back to its original cost basis.
Behavioral finance tags this as a “cognitive error.” By failing realize a loss, you may actually be losing in two ways. First, you avoid selling a loser that may continue falling until it’s worthless. Second, there’s the opportunity cost of what may be a better use for those investment dollars.
While professional investors may manage to generate alpha, (or excess return over a benchmark) by investing in a few concentrated positions, common investors should not try to do this. Instead, you should stick to the principle of diversification.
In creating an ETF or mutual funds portfolio, bear in mind to allocate an exposure to all major spaces. In building an individual stock portfolio, allocate to all major sectors. In general, you should allocate more than 5 percent to 10 percent on any single investment.