Nobody's perfect. We are all going to have our wins and losses, especially when it comes to investing. But some of the mistakes you might make when trading stocks are actually pretty common, and by no means reserved exclusively for you alone. In fact, the majority of investors make many of the following mistakes.
The good news is that most of these mistakes can be avoided simply through awareness. We will take a look at the 10 most common mistakes and identify ways in which you may be able to stop the habits—or even turn them to your advantage.
Not Investing
Of all of the mistakes you might make on your investing journey, perhaps the greatest mistake you could make is not investing at all. Retirement is expensive, and unfortunately, most of us won’t be able to save enough without a lot of help from the stock market
Imagine saving $250 per month from the age of 25 until you retire at age 65. If you were to keep that money in a bank account that does not accumulate interest, you would have just $120,000 by the time you retire. Unfortunately, that’s not likely to last you very long.
But what if you had invested that same $250? According to the Securities and Exchange Commission (SEC), the stock market has an average annual return of about 10%.1 With that, your $250 per month contribution would result in you having about $1.34 million by the time you retire. You saved the same amount of money throughout your working life, but putting that money into the stock market instead of a non-interest-bearing account made the difference of more than $1 million.
Buying Shares in a Business You Do Not Understand
Too often, investors gravitate towards the latest "hot" industry. They may know very little, or even nothing, about technology or biotech, or the specific business the underlying company is engaged within, yet they think it will be the next profitable investment.
But when you understand a business, you have a naturally built-in advantage over most other investors. For example, if you run a restaurant, you may be in tune with the back-end business involved with restaurant franchising. You will also see first-hand (and before they become public knowledge) the habits of the patrons. By extension, you will know if the industry is booming, getting slower, or cooling down, well before the vast majority of investors, making it easier to make strategic investment decisions.
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.
Expecting Too Much From the Stock
This is especially true when dealing with penny stocks. Most people treat low-priced stocks like lottery tickets and anticipate that they can turn their $500 or $2,000 into a small fortune. Of course, that can sometimes work, but it is not an appropriate mindset to have when you're getting into investing. You need to be realistic about what you are going to expect from the performance of the shares, even if such numbers are much more boring and mundane than the extreme levels for which you may hope.
Being Driven by Impatience
One of the most costly emotions you can have when your investing is impatience. Remember that stocks are shares in a particular business, and businesses operate much more slowly than most of us would typically like to see, or even than most of us would expect.
When management comes up with a new strategy, it may take many months, if not several years, for that new approach to start playing out. Too often, investors will buy shares of the stock, and then immediately expect the shares to act in their best interest.
This completely ignores the much more realistic timeline under which companies operate. In general, stocks will take much longer to make the moves that you are hoping for or anticipating. More importantly, the extreme highs and extreme lows don’t matter that much over a long-term investment horizon.
For example, the broader S&P 500 index has given an average annual return of 8.09% between 2000 and 2020. This includes five years when the index saw negative returns, including the great recession in 2008, when it was down by 36.5%.2
When people first get involved with shares of the company, they must not let impatience get the best of them or their wallet.
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