You might have read about common blunders that investors make, or maybe even made a few of your own. Like in nearly every aspect of life, mistakes in investing happen and the good news is you’re not alone. (There’s probably a very short list of investors who have never had an “oops” moment.)
Still, you’re probably looking to avoid as many blunders as you can. After all, it’s your hard-earned money that’s at stake!
Whether you’ve been investing in the stock market for ages, or are just starting to dip your toes in the investing pool, we’ll cover some of the most common investor mistakes. Watch out for these nine missteps as you put your money to work.
When you first get into investing, you might start out by buying shares of companies or an industry you’re familiar with. And while that strategy can work in the beginning, you’ll also want to make sure you’re diversifying your investments.
You’re probably familiar with the concept but just as a refresher, diversification means a portfolio that includes a mix of different investments (think stocks, bonds, commodities). The idea behind it is that you don’t have all of your eggs in one basket. So when one investment is down, you have others that could help cushion losses.
There are many different ways you can diversify your portfolio. One way to diversify (which we mentioned) is by divvying up your assets. Within each asset class, however, it can be helpful to diversify further. For instance, if you’re invested in stocks, they could be spread across small-cap and large-cap stocks. Or you might invest in different industries like technology or healthcare.
If you’d like to have a diversified portfolio but don’t want to have to actively manage it all on your own, you could look into ETFs. ETFs, or exchange-traded funds, are essentially a basket of different assets (stocks, bonds, commodities) that you buy the same way you’d buy a singular stock. In that way, ETFs basically have built-in diversification.
Skimping on these investing details may feel like a “no big deal.” But not having goals or a timeline in mind could leave you in a bad place financially.
Say you’re saving for a wedding, a goal that may require you to tap a certain amount of money within a year. With a more short-term goal like that, you may not be as interested in taking on the risk of stock market investing.
Volatility (which we know is an innate trait of the stock market) could take a bite off your balance. And if you don’t have enough time for the market to recover before you need the money, you could come up short of your goal. And nobody wants to be scrambling for cash last minute! If you need funds in the short-term, you might consider stashing them away in a high-yield savings account or CD.
In short, having a clear timeline and goals in mind can help you develop a strong investment strategy that’s appropriate for you and your financial needs. If you need help, check in with a financial advisor who can help you come up with both.
Seeing the money in your portfolio shoot up and down can be nerve-wracking. And even the most seasoned investors might panic when the market takes a hit. Or get a little too overconfident when it’s been doing well. Your emotions might get ahead of you and your own risk tolerance. And that could lead to some poor decisions based off fear (or euphoria) rather than your investing know-how and sound judgement.
To side step emotional investing, it’s a good idea to remind yourself markets go up and down. While not all stock market investors have long time horizons, having a longer timeline can help you weather any dips in the market, since the market tends to deviate quite a bit in the short-term.
More time can mean more opportunity for your investments to recover if need be. Knowing your risk tolerance and making investments that won’t drive your own anxieties into over-drive can also help keep emotional investing at bay.
We know what it’s like when you become attached to a particular investment (maybe your first stock that turned out to be a big winner?). When one of your investments does well, it sometimes can create an emotional attachment.
And you might replay how great it felt when you got that first big gain! It can be a mistake, though, if your attachment to a certain investment blinds you to its current performance and you stay invested in it longer than you should.
While we’ve all likely reasoned with a sinking ship at some point in the past, remember: past performance is not a guarantee of future results. You might consider shifting course if any of the fundamentals that pushed you to buy a stock have changed.
If every company with a unique, “good” idea made the kind of stock market gains we think it deserves, we’d all be have some nice profits to show for it. Unfortunately, there’s usually a lot more nuance involved with being successful in the market than just having a good idea.
It’s not to say that innovative ideas don’t win– they definitely can! But before you jump in and invest in a company that you really believe is bringing something revolutionary to the table, it’s still a good idea to do your due diligence.
Dig a little deeper into the company and its history. Check out its competitors and other things happening in the industry to see where they stand. Doing so can help you make an informed decision – rather than one based on emotions. (You already know it’s helpful to not let them take the wheel!)
Some people love being very active investors. Managing their portfolio on their own, researching potential stocks, and really digging deep into investing—they’re so into it. And some people, well, don’t love that so much. If you’re an investor who knows you’re just not going to be able to put in the time and energy to dive into research, it could be worth looking into having your investments managed by an investment advisor.
It’s not to say that you should only invest in industries you’re a part of, or intimately familiar with (that would likely limit your options quite a bit). Rather, it’s more about knowing where your knowledge and strengths lie and not trying to stretch yourself too far beyond your knowledge/areas of expertise.
If you’re dead-set on investing in an industry you’re not very familiar with, be sure to do your (can you guess it?) due diligence. We hate to harp on this, but really, it can make a difference.
If you want to invest in an industry you know nothing about it, don’t forget to do some research. You might be surprised by what you find, or you might find your resolve to invest strengthened even more.
We’ve all likely felt this temptation at one time or another – you see a stock that’s been climbing higher and higher. And you want to jump in on the hopes of benefitting from future climbs. But the reality is that we really don’t know if the stock will continue gaining, or for how long. In short, you could be buying in at a peak in price.
Similarly, many investors have felt the temptation to sell when it seems like a stock has just been dropping day after day. While it can certainly test our patience to watch one of our investments continue to lose money, it’s helpful to remember that investing in the stock market is a long game.
If you’re going to pull out every time one of your holdings starts doing poorly, you could consider investing more in bonds and other less-risky asset classes.
Both these points are to really just say – it’s not a good idea to try and time the market. It can be tricky to predict market movements and when to jump in and out. Knowing your risk tolerance and coming up with an appropriate target allocation and investment strategy (that does not require you to rely on your own guesses about stock performance) are usually much better strategies than trying to time the market.
Buying and selling stocks can feel exciting. Seeing profits add up can feel like a win. And maybe the losses give you a rush in the beginning, too.
But the truth is, jumping in and out of your positions every time the market moves can get very expensive, not just from the cost of purchasing various stocks, but from the costs and fees associated with multiple transactions.
What you pay will depend on your brokerage firm, but generally, they’ll charge you trade commissions every time you buy or sell a stock. Trading fees can vary widely, but they could run anywhere from $3-7 per trade up to $10-100 per trade.
The point is, those costs could add up quickly. So if you’re someone who’s “playing the game” and simply enjoy jumping in and out, those commission fees could significantly eat into any profit you’re hoping to make. So if you’re dead-set on wanting to jump around in your holdings, you might want to consider looking for a broker who doesn’t charge commission fees.
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Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Neither asset diversification or investment in a continuous or periodic investment plan guarantees a profit or protects against a loss.