- Letting emotions override logic.
One of the biggest mistakes new investors make when they are trying to make decisions on what to buy or sell is letting their emotions get the best of them. When the markets are in a bull market run or momentum is pushing certain stocks higher, it seems easy to get in and try to makes some money. What happens a lot of times is people tend to buy when the market is up and sell when the market is down. On the way up they fear they will miss out, so they want to try to get in on the action, usually they are getting in too late to get in on most of the upside. On the way down, they fear it will keep going down and they will lose more if they don’t sell, so they sell when the selling is usually over or close to being over.
Solution: You need to have a game plan no matter what you are buying or selling, if its for the short term or long term, you need to know when you want to get in and out.
2. Misjudging the level of Risk
Many times when people are looking to buy the next big thing, they are somewhat blinded by the potential risk of the underlying investment they are wanting to invest. If you read an article or think a certain industry or stock is going to be on fire, then you have a hard time understanding that the investment may have more downside or volatility than you realize. This type of investing is more speculative, which means it is based on assumptions that you make without concrete fundamentals supporting your assumptions.
Solution: When you are being speculative, you need to remember, it can always go to zero. If you are ok with the investment going to zero, then go for it. Just don’t let your optimism blind you to the downside potential.
3. Listening to the Talking Heads
There are so many people that are trying to benefit financially by trying to make wild predictions or try to predict where certain investments are going in the next so many years. You can’t get caught up in the so called Talking Heads Trap. Many of these guys are so called experts, but that doesn’t mean they’re always right and the investments they are talking about are right for you.
Solution: Take what they say and do your own homework. Try to determine if this is something that is within your risk appetite.
4. Market Timing
Many people try to choose a specific time to buy or sell an investment. Not even the best investors can do this. They may be better at it than you, but they still cannot time the market perfect. You need to make your decisions based on your investment time horizon, your risk tolerance, and the fundamentals or homework you’ve done on the company.
Solution: You can always make your investments in increments, or dollar cost average, so that you don’t buy all of your position at a top. You could buy some now, buy some if the investment goes down in price, and continue to do this until you have the full amount you want to own in that position.
5. Not Diversifying
This is a problem many investors face when they are trying to build their portfolios. They may buy 5 stocks that are all correlated together, which means when one goes up or down, they all go up or down. Diversification is not just owning different investments, it’s owning different investments that are not correlated directly with one another. This way if one investment or one industry is hit hard, then your whole portfolio will not be hit as hard. Some of the other investments may actually go up when one goes down.
Solution: If you want to provide some diversification to your portfolio buy an ETF or Fund that has several hundred investments within that fund to provide some diversification, then you can go buy individual stocks or investments if you want to.
If you’re new to investing, I hope these tips will help you avoid some of these common mistakes many people make when they try to invest without a professional. Most people don’t know what all is involved in investing until they get into it. If you find yourself lost in this investing jungle, please don’t hesitate to seek the help of a professional.