Surprisingly, investors often make the same mistakes. It is even more surprising to find out even veteran investors often repeat the same mistakes over and over again. It is hard to resist our human nature but one must overcome one’s urges in order to become a successful investor. Here are the top 10 mistakes to avoid in my opinion:
1) Investing in stocks for terms shorter then 5 years – A thumb rule of investing is the relation between term of investment and the percentage of the portfolio invested in stocks. Usually, the share of your portfolio invested in stock should be around 100% minus your age (for long term only).
2) Thinking you can outsmart the market – Look for long term return on investment.
3) Acting on the latest fad – Do not take shortcuts. Check for fundamentals. If the talk of the day is the stock market, keep away.
4) Frequent Trading – Constantly buying or selling does not improve returns and is costly in terms of commissions.
5) Constantly checking portfolio performance – Don’t allow yourself to be dazzled by good or poor performance on a daily basis. Ignoring noise (or variability) is a sure way of generating high returns in the long term.
6) Selling winning stocks too fast or holding on to losing stocks – Many investors often sell winning stocks too early and losing stocks too late thinking either the return on investment is enough or that their losses will be regained. More often then not winning stocks will continue to generate high returns and losing ones will continue to lose.
7) Not diversifying –Investors are usually exposed to astounding amounts of information at first from articles on certain stocks to analyst reports recommending other stocks. The hope of getting rich fast (or high return on investment) is usually a false one. It is possible to gain high returns in short times but very much like a casino you might also lose all your money due to the risk involved. Diversification or the purchase of a great amount of various financial assets enables investors to lower risks and smooth return on investment almost regardless of how a specific company performs.
8) Thinking in term of “All or nothing”- A mistake usually common in derivative traders “all or nothing” is simply taking unnecessary risks.
9) Investing with out a plan – Take the time to formulate an investing plan and investment goals. What are the risks you are willing to take? What is you term of investment? Answer these questions before building a portfolio.
10) Trying to time the market – It is time in the market, not timing the market. Decide on long term goals.