Even if you aren’t a newbie investor, it can be easy to make mistakes when investing.
From making decisions based on emotions to not having an effective investing strategy, there are several ways where you can go wrong.
In this article, we’re going to reveal 10 of the most common mistakes made by investors. Keep on reading for all of the details, or click on a link to head straight to a section…
Even if you’re already a stock market maestro, understanding where investors often get it wrong can help you become a better investor. Here is a list of 10 popular investing mistakes:
Having an investing plan, or strategy, is arguably the first thing you should consider before you invest. That’s because your investing plan is personal to you and it will help you decide what to invest in, and how you invest.
For example, the direction of your investing strategy should depend on a number of factors, including your time horizon and tolerance for risk.
Your investing strategy should also closely align with your investing goals. For example, you may have a desire to invest in order to support your children through university. Alternatively, you could be aiming to build up wealth so you can give up work early.
Whatever your goals, it’s vital you understand what motivates you to invest. If you don’t you could be at risk of committing an investing crime, such as investing outside of your tolerance for risk, or hastily selling your investments after a stock market crash. It may be an overused cliche but when it comes to investing, failing to plan is planing to fail!
2. Trying to time the market
While we’d all like to ‘buy low and sell high’, investing, sadly, often isn’t as straightforward as this.
Timing the market is notoriously difficult as it essentially requires you to know exactly when a share has reached its peak.
While some investors have confidence in their ability to predict future share price movements, data tells us luck is often the biggest factor. As a result, rather than trying to time the market, it may be better to prioritise ‘time in the market’ instead. You can achieve this by holding a long-term mindset.
3. being driven by emotions
Making investment decisions based on feelings or emotions can lead to unfortunate outcomes. Despite this, it’s one of the most common investing mistakes. We’re human after all!
However, if you can leave your emotions at the door, you’ll be less likely to crystallise losses by selling your shares in a panic.
Avoiding emotion when investing can also reduce the risk of ‘chasing losses’ or irrationally loading up on shares just because they’ve recently fallen. Remember, while it may go against your intuition, a share that has recently fallen is just as likely to continue falling as it is to bounce back.
Mixing up your investing portfolio is vitally important as it can reduce your exposure to risk. For example, equities and bonds typically have an inverse relationship, so a portfolio consisting of a mixture of these assets can reduce the chance of a heavy loss should the economy take a turn for the worse.
In contrast, a portfolio that solely invests in one asset, such as equities for example, is at risk of falling sharply during economic turmoil. Despite this, there are investors out there who are guilty of failing to adequately diversify.
To learn more, take a look at our article which explains the importance of holding a diversified portfolio.
5. FOCUSING on short-term gains
We all like the idea of making a quick buck. Yet while it can be rewarding to see a sharp rise in the value of your portfolio overnight, focusing solely on short-term gains may tempt you into making ill-advised decisions, such as buying highly volatile stocks.
To avoid this common mistake, always make an effort to stick to your investing strategy. It’s often wise to keep it ‘steady and slow’, as opposed to chasing roller-coaster shares.
We’ve all read articles on how a stock has risen 100%+ in a single week. Likewise, we’ve also heard stories about a new technology that’s destined to be the next ‘big thing.’
Under such circumstances it can be difficult to avoid the temptation to jump on the bandwagon. After all, the fear of missing out (FOMO) is human nature.
However, while there are exceptions, many stocks or industries tipped to go to the moon often fail to do so. In fact, investors who find themselves being persuaded by hype are usually too late to the game to make any meaningful profits. Potentially worse than this, investors who chase fads may even find themselves at the wrong end of the ‘greater fool theory’ by buying into a craze that has already passed its peak.
Rather than chase the latest fad, investors will often find more success by doing their own research, and sticking to what they know.
High investing fees can be a big burden if you choose the wrong provider. Yet, sadly, there are investors who fail to pay enough attention to fees.
As a rule of thumb, it’s always worth comparing a handful of investment providers before opening an account. That way you’ve a higher chance of finding a provider that charges fees that work best with your investing style. For example, investors who trade regularly will usually be better off opting for a provider with low, or zero share dealing fees. In contrast, investors who passively invest in the stock market may be better off prioritising the cost of platform fees. For more on this, take a look at our article that explains share dealing fees vs platform fees.
8. Being INFLUENCED by past PERFORMANCE
Another common mistake made by investors is to be influenced by past performance. For example, if a share price has risen substantially over the past 5/6 months or so, it may be easy to conclude that this pattern will continue. On a similar note, if a stock known for its temperamental share price has just plummeted in value, then some investors may believe it’s worth buying the stock while its low.
However, making investment decisions based on past performance is unwise. Instead, it’s best to recognise the concept of hindsight bias, and do your best to ignore it!
While many investors hold a well-diversified portfolio, it’s arguably just as important to review your investments every so often to ensure they continue to align with your investing strategy.
For example, say your portfolio consists of 70% equities and 30% bonds. Over time, it’s possible your equity allocation rises (or falls) more than your bond allocation. As a result, if you don’t review or rebalance your portfolio, you may end up holding investments outside of your risk profile.
10. Not doing your research
If you’re interested in investing, it can be tempting to dive straight in before you really know what you’re doing. With the explosion of mobile investing apps in recent years, it’s probable there are investors out there who have chosen to invest without doing enough research.
To avoid this common mistake, it’s really important that you do your own research before you enter the choppy waters of the stock market. If you’re a beginner investor, you may wish to read our ultimate investing guide for beginners.
Inspired by these common investing mistakes? Check out these articles for more information about growing your wealth.
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Disclaimer: MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.