The biggest mistakes folks who begin investing make
If you’re reading this you either
A. Have had poor returns in the market as an investor and would like to know WHY
B. You’re a beginning investor who wants to make good returns and avoid as many mistakes as possible starting out
If you’re either one of those two options then allow me to tell you that I am proud of you for seeking out this article. :) Not that many folks have the humility to know when they’re wrong or realize that they’re amateurs and know that they DON’T know it all. You would like to have a growing experience reading this and learn from your mistakes, rather than avoiding them, and for that, I am proud of you.
Now, let’s get to the good stuff. Here are a few mistakes folks in the market have made/done, some were mistakes that I made (some are mistakes that I still make even today, yikes), and some were mistakes my peers have expressed to me in concern as they started to invest. Shall we begin?
P.S this article isn’t meant for the day traders, I’m more focused on the long-term investors, sorry :(
1: Markets drop, people start to sell, others sell, you panic and you sell
If you have a long-time horizon, then these market fluctuations should NOT terrify you. If anything, I highly encourage you to place more cash in your investments that are losing value, and dollar cost average the living daylight out of your investment since you’re purchasing the shares of that fund or company at a cheaper price. Easier said than done, some studies have shown that losing your money right before your eyes is painful and can instill fear, the emotions justify selling your assets since your brain is saying “ouch, this hurts, please sell to lessen your losses, thanks.” So what the markets went down 1% today? So what if they went down 20% this whole year? After this market correction, you are bound to ENJOY a huge rally that follows such market correction, recession, or depression. Just stay on course and in the markets and hold on tight.
Solution: Automate your investments, deposit some cash every month to your brokerage account, have your brokerage buy shares of the fund or company you’re currently invested in, and don’t even worry about looking at your account until it’s time to sell the stock (during prosperous times of course.) Avoid news on where the markets are heading, are at, and the reason behind it. Stay. On. Course
2: Getting too cocky (confident) in the markets (A Jimmy problem)
Yeah, I was a bit too cocky and had a sense of euphoria when my portfolio was 25% up year to date. I settle myself down by telling myself “we’re in this 8 almost 9-year long bull market and literally EVERYONE is winning in their investments and portfolios. I shouldn’t celebrate and presume I’m the next Warren Buffett.” Like me, some folks who might be starting off might also benefit from this ferocious bull market and get really cocky about investing and think it’s cheese and that everyone who invests in the market makes a killing and huge profits. Here’s a suggestion, don’t. You will always run into a mistake and be bound to lose some value in your account. You know how you really determine the winners? See which investors can stomach a 20% - 50% downturn and still hold tight to their investments. Creds to those folks, they are either wizards and knew that the years that followed the markets would prosper, they have some large cojones, or they just did their research on their funds and companies where they placed their money in. Most likely the last two choices there.
Solution: Remain humble (like Kendrick’s song) on your returns/profits. Don't get this rush whenever you earn large sums of cash.
3: Trading too often
Unless you’re a day trader, which I’m not sure why you would be since Long-term investing >>>>>> day trading (I don’t discriminate though, if you find success in day trading, then good on you, I’m proud of you :)) but, you can’t be trading in and out of stocks if you have a long-time horizon. Since commission fees will eat up the cash in your brokerage account, taxes will also take a large chunk of your gains, and you’re overall inconsistent with your investments. I must remind you, the moment you invest in a company, you become part owner of that company. It's supposed to be like a marriage, longterm.Fortunately, I didn’t day trade at all when I first started to invest since I grew up with a bias that long-term buy and hold was EVERYTHING.
Solution: Avoid trading in and out of stocks, purchase the number of shares you need to buy, have your brokerage automatically invest in the stock or fund every month or so and from time to time, check up on how your portfolio is doing.
4: No research = trash returns
If you don’t place any research behind the fund or company you’re about to invest in, then don’t be surprised that later on, you have trash returns or a loss in your account.
Solution: If it’s a fund that you want to invest in, figure out the track record, the fees on the fund, and what specifically the basket of investments your fund carries. If it’s an individual company, then be sure you understand the company top to bottom, know how the company makes its profits, their balance sheet, their board of directors, and if they’re killing it in their market share/industry.
5: Diversification (either too much or too little. Another Jimmy problem)
If you’re only invested in ONE stock and that stock goes down, then the rest of your portfolio goes down with it (no duh). If you have numerous stocks that you’re invested in and you can’t keep track of them, you still have a problem. As a few of the stocks you pick are winning, some are losing and weighing you down from achieving phenomenal gains or you can't keep track of all your investments. If you love a certain industry and JUST invested in that industry alone and it suddenly tanks, guess what? So does your portfolio. I was foolishly invested in A LOT of companies that I believed would win for the years that followed. However, it somewhat became overwhelming and tiresome to keep up with every company, that I only settled just for 5 stocks.
Solution: Be diversified in a little bit of everything, NOT a lot, but just enough. Have a few shares in numerous industries, have a few bonds as well, maybe some precious metals in case of a sudden recession. Just don’t place all your money in one basket and don’t place your money in EVERY basket. Find that perfect and appropriate balance.
6: There is risk involved and not realizing it
You hear the news that certain stocks are moving at stupid percentages, everyone is getting amazing returns and amazing sums of cash in the markets. You get seduced by the wins everyone is having. You then convince yourself “what have I got to lose?” *Buzzard* You have plenty to lose.
Solution: Understand that with such volatility comes great corrections in the market. (You like that? I mean, I so totally ripped off “with great power comes great responsibility” but that was still fire. *ahem* anyway.) Just know that not everyone makes a killing their first run in the markets and that there can be potential losses if you don’t do your proper research or if you sell too soon.
7: Timeframe/window is TOO short
This ties back to making some quick gains and leaving the markets with a ton of cash in your pockets, which normally can’t happen and isn’t the case after commission and taxes. Again, sorry for the day traders, I love y’all and all but the taxes eat your gains before it even reaches your bank account.
Solution: Be sure to hold your investments for the following 5 – 10 years, reinvest the dividends, and let compound interest (or, interest on top of your interest) do its magic and you will win big league.
8: Listening to the noise and following the trend; either the media, friends, family, coworkers, boss, etc.
Ever heard of Bitcoin? Wall Street is all over it, hedge funds are placing large positions on cryptocurrencies, trying to turn 10 cents into $2, as well as anyone who has remotely heard of this hype. It's inevitable to bump into news articles on the new hot trend. You know what was hot and trending back in 1999? Internet stocks, the NASDAQ, Pets.com. Recall what happened in 2000? The crash of Internet stocks, the crash of the NASDAQ, Pets.com filing for bankruptcy and going out of business. It doesn't even have to be hyped and trending investments. It could be feedback from peers. “The company you invested in is bad because blah blah blah…” while it’s good on hearing a second opinion on what you’re invested in, don’t make decisions based on what you heard.
Solution: Be confident in what you invest in, always welcome bearish and bullish opinions on your investments, but certainly never decide based off what others have said. Always do your own research and make the decision you believe is right.
9: Investing in a company or industry you understand nothing about
Ever heard of Bitcoin? (Deja vu.) Some folks will always pursue the hottest stock, even if they don’t understand the fundamentals of the industry or company itself, how they make money, or what services or products they provide. Example: I know absolutely nothing about the energy sector, I try to, but I don't fully understand it, so I steer very far away from it.
Solution: Again, always do your research. If you don't understand it, then don't bother investing in it. There are some companies that I, to this day, have no clue how they function or how they make a profit. So I stay away from them.
10: Trading on margin
What does that mean? It means you borrow money from your brokerage and use it to invest. Granted you must pay back the money the brokerage let you borrow with interest of course. So, you somehow must have God tier returns for you to pay back your brokerage, with interest, AND make a profit for yourself.
Solution: Just stay the hell away from it. Warren Buffett couldn’t have said it better himself “you have no use for it if you’re dumb and you certainly don’t need it if you’re smart.”
11: Not rebalancing your portfolio (A Jimmy problem, and it’s still a recurring problem)
I have a confession to make! I had a few bonds at the beginning of the year, now stocks make up all of my portfolio. I’m trying to find the appropriate balance for me, being in stocks completely isn’t helping. You might also be facing a problem where your portfolio is entirely in precious metals or commodities or in bonds when you should have allocated your investments in the manner that's appropriate.
Solution: Check up on your portfolio from time to time, and if a certain investment is overwhelming compared to the other percentages of your portfolio, then it’s best to reallocate some of those assets or sell some of your assets
12: The money they placed aside wasn’t money they weren’t willing to POTENTIALLY lose
I have some friends who had to liquidate their brokerage accounts since they had some emergency. Luckily for them, they were up on their investments, now had they sold during a recession or bad economic times, not only would it hurt their overall net worth, but they might not have had enough funding for their emergency.
Solution: Have an emergency fund for situations like these, invest money you are willing to lose as you do run such risks.
If you’re making any one of these mistakes, then be sure to correct yourself, and if you haven’t, then power to you, hope you gain outstanding returns, and stay very focused on your investments :) also, be sure to comment if you think I missed some mistakes others make and share this to fellow investors who are making these mistakes who need a wake up call.