I hope that you have gone through the basics of investing in the past blog posts. If you haven’t done so, read the other posts before reading this. Before we go into details about investing, I wanted to emphasize some of the common mistakes. By knowing the common mistakes, you can avoid them. As money is at stake, you want to avoid mistakes as much as possible. You don’t need to repeat the same mistakes to prove that it’s a mistake. Below is a list of common investing mistakes to avoid.
Panic Selling
As a long term investor, you are in this game for the long haul. Thus, you need to behave like one and understand that markets go up and down also. It is the fundamental nature of the market to go up and down as it runs on emotions. When people are greedy, they tend to overpay for stocks and when they are fearful sell stocks. Panic selling is the process of you selling stock in panic. When there are negative news and sentiment, stocks may go on a downward spiral. It takes a lot of mental strength to hold on to a stock that is underperforming. This is why it is important to have a good understanding of the stock, the company and the sector the company is in. If the company is good, for every downtrend, there will be an uptrend.
Remember always that you are only losing when you sell. When others are being fearful and sell their stock, consider this as a massive sale. Grab the shares at a cheaper price and average down on your cost basis. Every sale decision should be triggered based on reasons other than panic. If you think the stock is overpriced, you may take some profit and re-balance the portfolio. If you have reached an investment goal, you may sell the stocks. For these reasons, make sure that your decision is not derived from the panic in the market.
If the fundamental reasons you choose to invest in the company change, it may be a good time to sell the stock. Like if there are changes to the business model that cause the company to lose revenue/profit.
Impulse Buying
Like panic selling, you need to avoid impulse buying in another Investing Mistake To Avoid. This is when you see or hear the news that x company share price moved up 20% in one trading session. You think that this momentum may continue and invest money into the stock with no research. Stock suggestions from friends can trigger impulse buying too. Before you decide to buy any company stock, do the necessary research and have conviction. It is this conviction that lets you stay sane when the stock takes a 20% dive.
More often than not, when you take a suggestion from your friend, this is because he has a position in the stock too. This friend of yours may not have done any research to understand how the company makes money. Remember that we all have different reasons to invest, while you are in this for the long-term, your friend may be doing short term trading.
FOMO
FOMO stands for fear of missing out. When your friend tells you that stock “X” had a run-up of 100% and will continue for another 100%. You think that you missed the 100% previous gain and don’t want to miss out on the expected future gain. When encountering these situations, do remember to research the company. Understand what drives the share price, is it healthy and have credible managers.
Remember also that a good company may not be a good investment. This depends on the price you pay for the company stock. Many of the great companies during the dot com bubble in the 2000s did not recover. CISCO stock can be an example of this. While the company survived the crash, the stock price did not. There is no need to fear missing out as there are plenty of opportunities in the market.
Impatience
If you are a long term investor, you should not be impatient. Most of the time, it takes years for companies to grow. The market is always forward-looking and will price in future growth. Meaning, you are already paying for some of the future revenues. It takes further increases to the company revenues and outlook to see some appreciation to the share prices.
Most of the money made from the stock market is by waiting. You buy good company stocks and hold them for 5,10 15 years and while waiting, it will compound and bring you wealth. It is always tempting to lock in the 20% gain when you see some fresh dollars. if you do so, you will forgo some real good money. I recall myself buying Apple shares at 124$ and selling them at 132$ after 2 months. At the time of writing this writing, which is 8 months after the sale, Apple shares are trading at 178$ per share. Do you see how much have missed out? I can feel the pain, this is why ting avoiding this mistake.
Not Researching The Company
This is a mistake most of the newbies make. I have done this too. I have made several purchases without doing proper research. I have learned my lesson, and I hope you don’t make the same mistakes too. If you don’t have the time to do research on individual stocks, it is better to buy into the index as a whole. There are broad market ETF’s trading in the exchanges that represent the top ‘n’ companies.
In the US there are ETF’s that tracks the top 500 companies in the Standard and Poor’s index. Singapore has Strait’s time index which is representing the top 30 stocks. India has a NIFTY 50 index too. There are ETFs that track these indexes, if you buy them and hold them, you will receive the market’s return. If you don’t have the time or interest to research individual companies, Go for low-cost ETF’s.
Buying Wrong Ticker
This is a manual error some people make, I even know someone who bought the wrong company stocks. When you research the company, take note of the ticker symbol. There are many companies with similar ticker symbols. Remember to double-check on the selected ticker symbol in the order before you hit buy.
Many newbies are victim’s of this human error, most of them executed the trades on FOMO.
Casino Mentality
People lose money when they treat the stock market like a casino. That means you go in with a mentality to make some quick profits and exit. This will result in you losing money. Casino’s are for playing games and making quick bucks. Stock investing can make money in the long term – provided you identify and invest in good companies.
Understand the difference between probability and possibilities. Investment is not a scheme to get rich overnight. It takes a long time to compound your money in the stock market and it’s not meant for short term financial goals. You should only set aside the money you don’t need for the next 5 years into the stock market.
Conclusion
These are 7 investment mistakes to avoid, based on what I have observed thus far. Always do the necessary research before making stock purchases. If you are familiar with more mistakes, do add them in the comments and let me know as well. I will be writing more articles related to investing and personal finance in the future. stay subscribed to get notifications when I post new content.