Almost everyone makes investment mistakes. Yet, these mistakes may benefit us in the future, as we utilize our knowledge to make better and more informed business and investing decisions even if they cost us money the first time around. Like the advices from our parents, we must often experience it ourselves before we truly learn from them. However, if we know about our tendencies before we make them, it is much easier to recognize the problem and learn from it. Here are 10 common mistakes that people make when it comes to investing.
1. Blinded by Reward
Being blinded by the possible rewards of an investment can lead us astray when it comes to the associated risk of that same investment. Hearing others speak of amazing dividends, huge returns, and immense profit taking can leave us chomping at the bit to jump into an investment without considering the risks involved. You must often step back for a moment and consider just why the payoffs are so high for a particular investment, and then decide whether the risks of such payoffs are worth what might only be a fleeting reward.
2. Impatience
Impatience has been the killer of many wise investments. Not waiting out a downturn in the economy or assuming a stock has seen its prime and selling it too soon, even though it’s a well-known and stable investment, could leave you with regrets.
As an example, one investor (he shall remain nameless for the purposes of this article) was once invested in Hilton Hotel Corporation stock. This same investor had bought his shares at $10. When the stock reached $14 and stabilized for several months, the investor lost faith even though he knew the stock was a rock solid investment. He didn’t need the money, but became inpatient and dumped the stock, took his profits and several years later Hilton was bought out, their stock selling for over $40 a share. Impatience got the better of him and he lost out big time.
3. Missed the Train
Missing the train when it comes to a hot investment can leave you frustrated and angry that you didn’t get on board with everyone else. Rather than chalking it up to a learning experience and looking for a new investment, you may decide to chase the train and jump on just as everyone aboard is jumping off. This can leave you holding the bag while others are taking their profits.
4. Bubble Bursting
A bursting investment bubble can leave a lot of people losing a lot of money. Not seeing the fall of a particular investment or investment area in time can leave you in a precarious position. During the last decade, areas such as real estate and technology have shown us just how dangerous bursting bubbles can be. When people start saying an investment is fail-safe or bound to make you money, it’s a good idea to start questioning the soundness of such advice. Remember the old adage, “If it sounds too good to be true, it probably is.”
5. Influence of the Masses
It can be easy to get caught up in the excitement of an investment. When everyone around you is telling you how great a particular investment is and how much money they are making off of it, it can be difficult to ignore the opportunity. However, as with bursting bubbles, that same herd of charging cattle that leads you to water can lead you off the side of a cliff when it comes to your investment decision. Listening to the masses rather than your own good sense (i.e. housing bubble, tech bubble) could be an investing mistake you’ll kick yourself over down the road.
6. Taking Investing Personally
Sure, it might seem like big business is out to get you and the oil companies raise gas prices every time you head to the pump to fill up your car, but taking investing personally can be a big mistake. Making investment decisions based upon personal preferences or because you’re angry about losses may only leave you angrier because you didn’t base your decision on factual information and sound investing practices.
7. Uncomfortable Investments
Some people find that they are unable to stop thinking about their investments because they are worried about losing money. Even though their investment decisions may be good ones, they are unable to stop fixating on the investments and lose sleep over the fact that their money is at risk. Sometimes investments just aren’t worth the fear that comes with them and for some people certain risk-involved investments may be considered a mistake due to the loss of peace of mind they are suffering.
8. Heightened Expectations
Heightened expectations of investment returns can result in poor decisions. Often influenced by Wall Street analysts or our financial advisors, many are no longer satisfied with four or five percent returns on their investments. Heightened expectations due to constantly being led to believe returns of eight, nine, or ten percent are a regular occurrence can lead to skewed decision-making regarding where and how money is invested.
9. Low Capital Investments
Sometimes it’s not that we don’t make the correct decisions, but when we do, we don’t put enough money into the pot to make the decision worthwhile. Purchasing 10 shares worth of stock when the stock price is $10 a share, even if the investment takes off, might not make a significant difference in your overall portfolio.
10. Investing Before Debt is Reduced or Eliminated
Sometimes we make the mistake of putting the cart before the horse in our investing. By making investments, even if they result in higher returns, before reducing or eliminating debt, means taking a much higher risk than necessary. Even if a particular investment returns 10% annually, if you are paying credit card interest on a similar amount at 20%, your investment choice might not be a wise one.
This post was written by Tom Becker who writes for Money Choices where he reviews high interest savings accounts and other investment vehicles.
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It made sense when you said investments should not be made based on personal preference. My sister wants to find a weekly trading journal subscription where she can learn about spread trades and limit moves in the market. The info in your article should be helpful so she can avoid common mistakes while starting out.
In our XYZ Corp example, you would be spending $10.00
for every $1.00 of earnings that the company consists of.
All the news, international index quotes, and graphs are
beneath. Investors have got a habit of buying hot
stocks.
Most common mistake is investors invest by their feelings.
Mistake #11. Afraid to make a mistake.
I believe making mistakes is not only an unavoidable event in the learning and growing process but all investors need to make mistakes if they are experiment with ideas and try new bold ideas. Since when is making a mistake a sin or something we should be embarrassed about? I say… go on forward without fear of failure, record your “mis-takes” so they become a building block towards success. If you are afraid to lose money, make judgement errors, or fear to damage your self-esteem a bit, don’t come to the investment playground. It’s like playing a contact sport; if you are afraid to be hit hard, go back to the bench and sit it out until you have the gumption to play the game as it’s meant to be played.
Good pointers here that people would be well served to keep in mind. Point 10 is a good point that is often surprisingly overlooked – often your best investment initially is to pay off expensive credit card debt. Another point I would add is to invest tax efficiently. Start off with tax favored (and long-term) investing like your 401 (k), IRA and even a 529 College Plan for your kids. Once you’ve maxed out your contribution limits, then you can consider other investments. The beneficial compounding effect of tax-favored accounts can be significant if you start investing relatively early on in life.
All good advice. People get caught up in the hype and listen to everyone but their own inner voice and good sense. But sometimes, even when we do our own research and make our own decisions, mistakes are made. Or things happen we could not have predicted in advance. It is hard to admit our error or realize situations have changed, but knowing when to throw in the towel and sell the loser and move on is important too.
Something esential, know the instrument and investment class where you are investing.
Good list – I’d add two more: investing in a mediocre company to begin with and then rationalizing after the fact that it’s a much better company than it really is (very easy to do).
That’s a good one too. There are actually way too many common mistakes. Maybe that’s why most people lose money when they try active investing themselves.
What is even worst is people thinking that the only way to invest is through the stock market or only through a mutual fund. It wasn’t until I started real estate investing that I discovered that where the common media tells us is investing is no more than propaganda for the investment bankers. There are so many ways to invest, many of them safer and with higher returns than the stock market.
And what are some of these ways?
I totally agree with doing your homework. Sadly, most people are too lazy to do research and most of the rest don’t really know how. Anyone can learn, but it takes dedication just like anything else.
If you don’t have, or simply don’t want to spend time on research, then just buy index funds..
Agreed. It takes work to be an active investor.
I agree with doing personal research.
As a relatively new investor, what are the realistic expectations of the extent of research? How much research can a working individual do that is meaningful given the limited time?
Ed,
You just want to check up on your investments periodically. For a stock, you want to pay attention to quarterly earnings, conference calls, and annual reports. You just want to watch out for anything that will materially affect your investment. If you are investing for the long term, an hour or two a month will suffice.
Great advice Mark! And great questions Ed. I am learning as I go and realizing that quarterly reports are key…
I’ve never understood why people buy when stocks are going up and sell them when they’re going down. Wouldn’t it make more sense to do it the other way around?
Jenna said exactly what Iwas thinking. Doing your homework first is one of the most important things to do when investing.
Not doing personal research.
Most often people make the number one mistake especially for noobs. They are entice to make an investment because of the high returns and without even thinking that the higher the returns, the higher the risk of failing. Great list by the way, I’ll make sure this is listed on my notes.