Investing is a skill and mind you, a tough skill to learn and practice successfully. Therefore, while starting for the first time, most people commit some deadly mistakes which can actually end their entire enthusiasm for investing if not more.Investment mistakes can cost you money, and that’s why you must try to avoid them. Successful investing is not just about selecting the right stocks. One must also avoid simple mistakes that might undo all the previous hard work.
The good news is that most of these mistakes can be avoided simply through awareness. We will take a look at the 8 common investing mistakes you should avoid and identify ways in which you may be able to stop the habits—or even turn them to your advantage.
#1 Blindly Following Others Advice
The most common investing mistake that people often commit when they start investing is to blindly follow what others are saying. I understand its not their fault. When you don’t know about something and others around you call themselves experts, it’s easy to follow their line.
However, this could actually cost you badly then doing any good. This is so, there is no one who could accurately predict the market. Also most self-claimed experts actually don’t know anything about investing themselves and even everyone’s financial goal differ from one another and so do their investing strategies.
So, the best practice is to first learn about the nuances of investing instead of following others blindly. There are a lot of free platforms to learn the basics. You can even check out my post on basics of stock market to learn the basics. This way you would actually be in control of your money.
#2 Putting All of Your Eggs in One Basket
Diversification is one of the foundations of responsible investing. Diversifying your portfolio helps to reduce your risk so that if one of your investments underperforms, it doesn’t necessarily impact your entire portfolio. When you put all of your eggs into one investment, on the other hand, one event could damage your entire portfolio, and therefore your financial future.
There are two ways to diversify your portfolio. First, you can diversify across asset classes. One example would be putting some of your money into stocks, some into bonds, and some into real estate. As a result, if the stock market crashes, but the bond market performs well, some of your investments still move in a positive direction.
The other way you can diversify is within asset classes. So, instead of putting all of your money into the stock of a single company or industry, you would buy stock in many different companies.
#3 Lack of Patience
Successful long term investing is 1% action and 99% patience. However, many investors lack that patience and end up continually tinkering with their portfolios. To have a disciplined approach, you must look beyond the short-term volatilities and concerns and concentrate on the market’s long-term growth potential. Market fluctuations are bound to happen. However, it’s crucial to stay the course and stay invested if feasible.
A slow and steady approach to portfolio growth will yield greater returns in the long run. Expecting a portfolio to do something other than what it is designed to do is a recipe for disaster. This means you need to keep your expectations realistic with regard to the timeline for portfolio growth and returns.
#4 Using Money You Cannot Afford to Risk
You would be stunned if you could see how different your trading style becomes when you are using money that you cannot afford to risk. Your emotions get heightened, your stress level goes through the roof, and you make buying and selling decisions you otherwise would have never made.
When evaluating stocks, consider your risk tolerance—your ability and willingness to lose a portion or all of your original investment in exchange for greater potential returns. You should never put yourself into a high-pressure situation where you are putting money on the line that you can’t risk to lose, such as money in your retirement fund or emergency savings.
When you invest with money that you can afford to risk, you will make much more relaxed trading decisions. Generally, you will have much more success with your trades, which will not be driven by negative emotions or fear.
#5 Trying to time the Market
Another common mistake in stock trading is trying to time the market. It’s challenging to time the market, and even seasoned investors often fail to do it right.
The stock market is too uncertain to be timed. By the time you have made a move to capitalize one situation, the market might turn upside down and you might end up incurring unbearable losses. So, just don’t try it. Instead see the long term trend of the stock by doing a fundamental analysis.
By doing fundamental analysis, you would be able to make profits. Timing the market may give profits once or twice, however, the losses it can bring can make you repent your decision.
#6 Averaging Down
Averaging down is typically used by investors who have made a mistake already, and they need to cover their error. For example, if they bought the stock at $3.50, and it drops to $1.75, they can make that mistake look a little bit less awful by purchasing a whole bunch more shares at this new, lower price.
The result is that now they’ve bought the stock at $3.50, and more at $1.75, so their average price per share is much lower. This makes their loss on the stock appear far smaller than it truly is.
However, what is really happening is that the individual bought a stock that dropped in value, and now they are sinking even more money into this losing trade. This is why some analysts suggest that averaging down is just throwing good money after bad.
Averaging down is typically used as a crutch to help investors cover the mistake they have already made. A more effective strategy is to average up, where you purchase more of a stock once it starts to move in the direction you are anticipating. The share price activity is confirming that you made a good call.
#7 Investing Without a Goal & Understanding your Risk Profile
In almost every area of life – whether its fitness, dating, career, or investment – setting goals is extremely important. Once you set a goal, you are determined and focused to achieve it.
Once you have a goal in mind, you get disciplined and focussed. Achieving that goal becomes your first priority. Your brain tries to bring down all possible obstacles that keep you away from achieving these goals. Once you set a goal, like buying a house or going on vacation to your favorite destination, you are less likely to miss your SIPs or tamper with your savings. Because, suddenly, you feel like these goals matter to you the most.
So, you would do anything to make them happen. Think of goals as blinders that are put on horses to not distract them from winning the race.
As important as it is to set a goal, understanding your risk profile is equally important. Different mutual funds have different investment mandates. A large-cap fund must invest 80% of its total assets in the stocks of large-cap companies. Whereas, a conservative hybrid fund, must invest 75% to 90% of their total assets in debt instruments, and the rest 10% to 25% in equity and equity-related instruments.
So, the risk associated with every fund category differs because of its portfolio composition. An equity-oriented portfolio will have more risk than a debt-oriented portfolio. So, before investing in mutual funds, you should assess your risk profile. Ask the question – How much risk are you willing to take? Then, choose a scheme that is in line with your risk profile. This way you’ll be relatively safer even if things go south for you.
#8 Reshuffling Your Investment Too Often
Following the herd is something that is very prominent in the investment world. By looking at the returns or a promising headline, makes a lot of investors sway towards doing the same thing. Many investors make the mistake of falling into this trap too often. Based on the predictions based on headlines and by following the herd, they try to reshuffle their investment portfolio too often, attracting exit loads, which eventually eats into your overall returns.
Frequent churning of the portfolio also hampers the growth potential of investments. This is because some funds, like equity funds, perform well only in the long run. Frequent churning would make you lose out on time and bring you back to where you started. So, it will take you more time to realize your goals, and also, you will miss out on various opportunities that happened during the time frame.
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The Bottom Line
Ideally, you will not be committing too many of these common errors. However, the fact of the matter is that the majority of investors will make some of the mistakes which we’ve discussed in the article above.
Luckily, you can channel your inner teenager and learn from your mistakes. In fact, most people learn more from their losses than they do from their gains.
Given enough time, and a sufficient number of trades, you will be in a better and (hopefully) more profitable situation. Ideally, you will phase out the common mistakes quickly enough that you still have a big part of your portfolio left on the other side. Then, with your newfound wisdom, you should be able to start gathering some profits.