Common Mistakes in Stock Investing

There is no perfect investor. To make money over the long-term, all you have to do is make fewer investment mistakes than your peers. This sounds easy, but it isn’t. Even seasoned investors make mistakes from time to time.

We look into some of the mistakes you should avoid to if you want to build wealth in stock investing.

1. Invest when credit card debt is accumulating.

Credit cards are known to come with high interest rates and this makes it tough for paying off the debt. It is not easy to find an investment that has a rate of return higher than the credit card interest rates. You would be better off using the money to pay off your credit card balance than using it to invest.

2. Invest using money you cannot afford to lose.

Some people will borrow money from credit cards, or source for short term financing to invest in the market, hoping to make a quick gain, pay off the debt and pocket the profits. Unfortunately, the market is unpredictable and the market can move up or down in the short-term for many reasons.

If your investment falls in value, then you will be left with some debt even if you sell off your investment and use all the money to pay down your debt.

3. No proper planning.

Investments decisions are made without proper planning and goal in mind. The investor has no strategy, no predetermined entry and exit prices, no time horizon and certainly hasn’t given a thought on tax at all. As a result, critical decisions are made without any basis. The investor just hopes for the best. But the market is not always kind to the investor.

4. Buying on tips and rumors.

Chances are that now and then your friends will let you in on certain tips and so called insider news about a particular stock. Being all fired up and not wanting to miss out on the opportunity to make a quick gain, you set out to buy this stock without properly researching the company.

Seasoned investors and professional fund managers gather information from multiple independent sources and conduct their own research before making an investment decision. Any tips and rumors you’ve heard, so have many others, and so the information is likely already factored into current market price.

5. Starting out too late.

It is a misconception that investing is reserved for the elderly and rich. It is never too early to start investing. In fact, it is better to start investing as early as possible so you can let your investments grow, compound and accumulate.

If you started investing $1,000 annually at the age of 20 at a 10% rate of return, and assuming you reinvest all your returns, by the age of 50, you will have $180,943.

If you started 10 years later investing $1,000 annually at the age of 30 at a 10% rate of return, then by the age of 50, you will have $63,002.

Clearly it pays to start investing early to take advantage of the power of compounding interest.

6. Selling winners and holding on to losers.

It is natural to think of selling your stock if the price has gone up so you can take the profit and invest in something else. But how do you know if the surge in price is just temporary or for the long-term? Is the price above or below its intrinsic value? Without doing your research, you will never know the answers to these questions. And when you sell the stock, you could be selling a stock that is more valuable than the price you sold it for.

Most investors have this mindset to recoup their losses before letting go a stock. If the stock price has fallen by 20% than the price they paid for it, they will hold and wait for the stock price to rise up till the price they paid before they will sell the stock.

Knowing when to buy is as important as knowing when to sell.

7. The herd mentality.

Do you buy the hot stock that the crowd is buying and sell the great stock when the crowd is selling? Often times, the hot stock is overpriced and when the buying frenzy is over, you will find that you have paid more than what the stock is worth. Your decision to buy or sell should be based on your valuation of the stock.

8. Not investing during bad times.

Economy moves in cycles. Good times will be followed by bad times, and when the bad times are over the good times will come again. The bad years are the best times to look for bargains and prepare your portfolio for the good years ahead.

9. Trading too much.

Many of us are employees and our compensation is based on the time we spend on our job. If we work more, we get paid more. Therefore, it is not surprising to find people thinking that the more often they trade, the more gains they will make.

However, in investment, this is not necessarily true. Every time you trade, you will incur commission and taxes. If your gain is small, the commission and taxes could easily wipe out all your gain. It is better to hold the stock for the long haul to let the stock grow and accumulate in value.

10. Assuming a good product equals a good investment.

You may like a product and start to think of investing in the company. After all, if you love the product, there will be millions of others who love this product too. And the company will make lots of profits just by selling this product.

However, investment is not as simple as this. A great product doesn’t necessarily mean a good investment. Some companies operate in industries with tight margins and unpredictable consumer trends. One should never assume that a company selling a good product is a good investment.

11. Buying too few, or too many.

To minimize your risk, you should diversify your portfolio. Allocate your assets into different classes depending on your risk investment profile. Buy stocks from different companies and from different sectors. This way, a downturn in one company or one sector will not drastically impact your entire portfolio.

A portfolio with too many different stocks will be difficult to manage. You need to stay on top of your investments and understand the trends of the industries. This takes up a lot of time. You would have been better off investing in mutual funds.

12. Gambling with investments.

Nobody wins all the time. Even the most savvy investors will make losses. Some investors lose their rationale when their investments make losses. They become desperate to cover their losses and their greed blind their judgement. This is when these investors become gamblers.

There are similarities and differences between stock investing and gambling. However, we must always be very clear in our mind not to gamble with our investments.

In summary, if you can consistently avoid making these mistakes over the long-term, then you will be very far ahead of the average investors.

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