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Common Mistakes Made by Investors And How To Avoid Them

Mistakes are part of the game. But as an investor, you should do your best to avoid high-cost mistakes - here are some good tips
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024
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Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024

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Table Of Content

If someone approached me claiming they never make mistakes in investing, I'd likely respond with a big smile.

Despite all the investing books, websites, and plans out there, there's still no perfect algorithm for flawless investing every time. Investing inherently involves risk, and it should always be acknowledged as a gamble, regardless of the odds.

Mistakes are bound to happen in the world of investing. Furthermore, investing can be emotionally and mentally draining, especially when you've been in the market for a long time and the results are not as expected or you're experiencing rapid losses.

Some common mistakes made by investors include:

1. Not Understanding What You Purchase

Warren Buffett and loads of other veterans in the stock market claim that buying shares of something you don’t quite understand is a good way to fall on your sword.  So to make it clear, you should not invest in a company if you don’t understand and “get” their business plan and models.

A good idea and a smart way to avoid this is by establishing a portfolio that varies with exchange-traded funds or mutual funds; choosing to purchase stocks in a specific company can be rewarding, but only if you understand the company and its business plan/market.

Overall, investing without thoroughly researching the company or asset can lead to poor investment decisions. Understanding the fundamentals, financial health, competitive landscape, and industry trends is essential before investing.

Here are some good sources when you can learn, get daily updates and make a good research:

Source
Specialty
Bloomberg
Financial data and news
Seeking Alpha
Financial news and analysis
MarketWatch
Financial news and commentary
Yahoo Finance
Financial news, data, and analysis
Zacks Investment Research
Stock ratings and analysis
Morningstar
Investment research and analysis
TradingView
Technical analysis and charting

2. Too Eager To See Results

Patience is a crucial element in investing, as hasty decisions or eagerness can lead to problems. Successful investors understand that fortunes are not made overnight, and instant profitability is unrealistic.

Life, including investing, doesn't always go as planned. Even valuable assets, like diamonds, appear rough initially.

Patience ranks among the essential qualities for investors. Stocks that initially seem unpromising can turn highly valuable over time. It's not uncommon for investments to appear lackluster initially but later prove to be profitable.

During downturns or recessions, it's challenging to identify the situation until after it happens. The story of the Turtle and the Hare racing still applies; slow and steady progress often outperforms impulsive decisions.

Investors must stay focused on their goals, have realistic expectations, and avoid relying on luck or magical outcomes. Waiting for a manager's strategy plan to follow through is prudent, as these cycles may take varying lengths of time.

3. Bad Planning/No Planning

Failing to have clear plans and objectives in investing is akin to self-sabotage. To address this issue, follow these steps:

  1. Create a comprehensive plan that includes the following aspects:

    • Future Plans: Identify your long-term goals, whether it's securing a comfortable retirement or establishing your own business.

    • Risk Tolerance: Determine if you are a conservative, moderate, or aggressive investor. Tailor your investment approach accordingly, considering factors like saving for retirement or seeking growth.

    • Define Success: Set specific benchmarks for what constitutes a successful investment and what falls short. These milestones will help you stay motivated and focused.

  2. Money Allocation: Know where your money is going and the markets or stocks you plan to invest in. Consider alternative investments if appropriate, and allocate percentages to different assets based on your strategy.

  3. Diversification: Avoid putting all your eggs in one basket. Diversify your investments across various categories to reduce risk and increase potential returns.

A well-structured plan acts as insurance for your financial future, providing a clear strategy to navigate challenging market conditions. By following these steps, you can avoid the pitfalls of aimless investing and work towards achieving your long-term goals with confidence.

Here's an example of a diversified portfolio:

Asset
Allocation
Blue Chip Stocks
15%
Dividend Stocks
10%
Growth Stocks
5%
Small/mid cap stocks
5%
Real Estate
10%
Government Bonds
25%
Corporate Bonds
10%
Gold/Silver
5%
CDs
10%
Cash
5%

4. Falling in Love with a Company

Just because a stock provided good returns earlier does not mean you should feel an emotional connection to buy it! Keep the emotions out of the markets! If you buy an investment, it shoots up 30%, and you feel amazing, that’s great!

However, that doesn’t mean you should instantly look for that stock every time you want to invest. Most of the time, you end up getting yourself beat when you have an emotional approach.

Always remember why you purchase stocks: to make money consistently. Once you identify this problem, your returns and strategy will skyrocket upward, making you more successful.

5. Overtrading

Overtrading refers to excessive buying and selling of securities within a short period, driven by the desire for quick profits or an emotional response to market fluctuations. Investors engaged in overtrading often make frequent and unnecessary transactions, which can lead to higher transaction costs and reduced returns.

This behavior is problematic for several reasons. Firstly, overtrading can erode profits through brokerage fees and other transaction expenses.

Secondly, constant buying and selling can disrupt a well-thought-out investment strategy, leading to suboptimal decision-making. Additionally, overtrading is often associated with emotional investing, where fear and greed dictate actions rather than rational analysis.

By succumbing to overtrading, investors may also miss out on the potential benefits of long-term compounding, as short-term gains are prioritized over sustainable growth. To avoid overtrading, investors should adopt a disciplined approach, focus on a well-researched investment plan, and exercise patience in response to market fluctuations.

Mistakes Made by Investors
Constant buying and selling can disrupt a well-thought-out investment strategy

6. Listen To Recommendations by Friends and Coworkers

Hey, I'm on the lookout for some promising stocks to invest in. Any recommendations?”

“Well, I've had good results with ____, and also ____. They might be worth considering.”

“Thanks for the suggestions! I'll definitely check them out!”

However, blindly following your friend's choices without doing your research is not a sound strategy. While it may work out occasionally, more often than not, it leads to unfavorable outcomes.

If you have a knowledgeable friend in the stock market, that's great! Collaboration can be beneficial. However, avoid relying entirely on their advice and make impulsive decisions. 

It's crucial to conduct independent research, seek advice from professional financial advisors, and develop a well-thought-out investment strategy tailored to your specific circumstances. While friends and coworkers may have good intentions, making financial decisions based solely on their recommendations can undermine your long-term financial success.

If you do want to rely on other people advice, here are some experts you can consider following:

Expert
Known for
Peter Lynch
Successful investing strategies
Warren Buffett
One of the most successful investors of all time
Benjamin Graham
Father of value investing
John Bogle
Founder of Vanguard, a mutual fund company
Ray Dalio
Founder and CEO of Bridgewater Associates, a hedge fund company
Jim Cramer
Former hedge fund manager and the host of CNBC's “Mad Money.”

7. Unrealistic Expectations

This one is hard. We think about saving, providing, paying bills, buying a few of those “wants”, and we invest… shouldn’t everything line up and our investments pay off? Well, no.

Investing won’t make us rich overnight. We are especially let down when we aren’t rich even after managers of our investments

Investing won’t make us rich overnight. We are especially let down when we aren’t rich even after managers of our investments promise outsized returns. You can’t win everything. You probably won’t be the next hedge fund manager news companies ask about for stock picks; however, keeping the end goal in mind and not having expectations above and beyond will definitely help you.

Don’t listen to the hype about some penny stock that soars up in value or any person on the internet that claims to be above everybody else. Keep it real!

8. Ignoring Fees And Expenses

Ignoring fees and expenses refers to the oversight of the costs associated with investing.

Many investors focus solely on potential returns without considering the impact of fees on their overall gains. Fees can include brokerage commissions, management fees, expense ratios for mutual funds or exchange-traded funds (ETFs), and other transaction costs.

Over time, these seemingly small fees can significantly erode investment returns, reducing the final value of the portfolio. Being aware of and minimizing fees is crucial for optimizing long-term performance.

Choosing low-cost investment options, like index funds, can be an effective way to mitigate expenses and preserve more of the returns generated by the underlying investments.

9. Not Reassessing And Adjusting

By not reassessing your investments periodically, you might miss out on new opportunities or be exposed to unnecessary risks. For example, a once-promising company you invested in may face challenges, or a new technology might disrupt an entire industry.

On the other hand, if you never adjust your plan, you could end up sticking with investments that are no longer suitable for your goals. By revisiting your strategy regularly, you can make informed decisions, take advantage of new opportunities, and ensure your investments are in line with your changing needs and risk tolerance.

Think of it like a GPS on a road trip; you need to check your progress and adjust the route occasionally to reach your destination efficiently. Similarly, reviewing and adjusting your investment plan helps you stay on track towards your financial goals.

10. Not Considering Risk Tolerance

Risk tolerance refers to how comfortable you are with taking risks in your investments. It's like asking yourself, “How much risk am I willing to handle for potentially higher returns?”

Imagine you're playing a game with two choices: one where you might win a lot, but there's a chance you could lose a lot too, and another where you may win less, but the chances of losing are lower. Your decision to pick one option over the other depends on your risk tolerance.

In investing, it's essential to know your risk tolerance before choosing investments. If you're okay with the possibility of big ups and downs in your investments and are willing to ride out market fluctuations, you might have a higher risk tolerance. But if you prefer more stable and predictable returns, you likely have a lower risk tolerance.

Knowing your risk tolerance helps you build a well-suited investment plan that aligns with your comfort level. It ensures you don't take on more risk than you can handle and gives you the best chance of achieving your financial goals.

FAQs

Realistic expectations help investors avoid unrealistic returns and make more rational decisions.

Minimize mistakes by educating yourself, seeking advice from professionals, and maintaining a disciplined approach to investing.

Chasing quick profits can lead to impulsive and risky investments, often resulting in losses.

Building a balanced portfolio involves diversifying across different asset classes, such as stocks, bonds, and real estate, to reduce exposure to any single investment's risks.

Manage FOMO by sticking to your investment plan, avoiding impulsive decisions, and reminding yourself of your long-term strategy.

Yes, investing borrowed money, or using excessive leverage, can magnify losses and put you in financial jeopardy.

Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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