It is unfortunately easier to lose money than to make money when investing. The famous investor, Warren Buffett, has pointed out that the first rule of investing is not to lose money and the second rule is to remember the first. So, how do you make money instead of lose it when investing? There are common mistakes that investors make and if you can avoid these mistakes your investing will proceed with fewer losses and more gains. What are the common investing mistakes? First let’s see what Investopedia says about the 7 common investor mistakes.
Of the mistakes made by investors, seven of them are repeat offenses. In fact, investors have been making these same mistakes since the dawn of modern markets, and will likely be repeating them for years to come. You can significantly boost your chances of investment success by becoming aware of these typical errors and taking steps to avoid them.
Here is the list of common investing mistakes and suggestions for how to avoid each mistake.
No Plan: Create a plan that includes your goals and objectives, takes account of risks and sets benchmarks to aim for. Decide how much you are going to allocate to investing and consider how you are going to diversify your investing.
Too Short of a Time Horizon: Because most investors are looking to make money that they can uses years later such as for retirement they should avoid being too short sighted and invest for a decades long time horizon.
Excessive Focus on Financial Media: News about how someone made a lot of money does not necessarily mean that you can make money. And if someone is selling a newsletter for $50 a month claiming that you can make millions, why are they bothering to sell newsletters instead of investing in their idea? Learn how to calculate intrinsic stock value and spend time looking for bargains.
Not Rebalancing: You need to examine each stock that you buy using an intrinsic value approach. And you need to continue to evaluate the stocks in your portfolio and dump the losers.
Unrewarded Trust in Portfolio Managers: The sad fact of the matter is that the majority of investment fund managers underperform their benchmarks. During many years an investor would have been better off with their money in an ETF that tracked the S&P 500 than in a fund where they were paying money to someone who steadily shrinking the investment portfolio.
Not Enough Indexing: Rather than looking for the miracle portfolio manager look to index funds that typically rank better than two-thirds of actively managed funds.
Chasing Performance: Perhaps the most common investing mistake is that investors look at stocks, funds, market sectors that have been doing well and invest in them without realizing that they are already overbought. This also why you need to be careful about reading the financial news because it is, in fact, yesterday’s news.
And the Psychology of Investing
Fear and greed are the twin demons that lead to many investment losses. If you want a quick look at how fear or greed is driving markets check the CNN Money Fear & Greed Index. When fear is high investors flee the market and when greed is high they pile in, in both cases this happens even when fundamentals indicate the opposite.