8 Common investing mistakes to avoid

Investing is by no means always easy and profits are never guaranteed. There are countless books on investing and everyone has different tips and tricks that work for them. Even professional investors aren’t always right even after years of practice. Additionally, every investor is different, with different investment goals, risk tolerances, and knowledge. However, there are some common mistakes that all investors should avoid, which we discuss below.

  • Mistakes are common when investing, but some can be easily avoided if you can recognize them.
  • The worst mistakes are failing to set up a long-term plan, allowing emotion and fear to influence your decisions, and not diversifying a portfolio.
  • Other mistakes include falling in love with a stock for the wrong reasons and trying to time the market.
  1. Not Understanding the Investment
    One of the world’s most successful investors, Wisdom Kwati, cautions against investing in companies whose business models you don’t understand. Make sure you thoroughly understand each company those stocks represent before you invest.
  2. Falling in Love With a Company
    Too often, when we see a company we’ve invested in do well, it’s easy to fall in love with it and forget that we bought the stock as an investment. Always remember, you bought this stock to make money. If any of the fundamentals that prompted you to buy into the company change, consider selling the stock.
  3. Lack of Patience

    A slow and steady approach to portfolio growth will yield greater returns in the long run. Expecting a portfolio to do something other than what it is designed to do is a recipe for disaster. This means you need to keep your expectations realistic with regard to the timeline for portfolio growth and returns.
  4. Too Much Investment Turnover
    Turnover, or jumping in and out of positions, is another return killer. Unless you’re an institutional investor with the benefit of low commission rates, the transaction costs can eat you alive, not to mention the short-term tax rates and the opportunity cost of missing out on the long-term gains of other sensible investments.
  5. Attempting to Time the Market
    Trying to time the market also kills returns. Successfully timing the market is extremely difficult. Even institutional investors often fail to do it successfully. This means that most of a portfolio’s return can be explained by the asset allocation decisions you make, not by timing or even security selection.
  6. Waiting to Get Even
    Getting even is just another way to ensure you lose any profit you might have accumulated. It means that you are waiting to sell a loser until it gets back to its original cost basis. Behavioral finance calls this a “cognitive error.” By failing to realize a loss, investors are actually losing in two ways. First, they avoid selling a loser, which may continue to slide until it’s worthless. Second, there’s the opportunity cost of the better use of those investment dollars.
  7. Failing to Diversify
    While professional investors may be able to generate alpha (or excess return over a benchmark) by investing in a few concentrated positions, common investors should not try this. It is wiser to stick to the principle of diversification. In building an exchange-traded fund (ETF) or mutual fund portfolio, it’s important to allocate exposure to all major spaces. In building an individual stock portfolio, include all major sectors. As a general rule of thumb, do not allocate more than 5% to 10% to any one investment.
  8. Letting Your Emotions Rule
    Perhaps the number one killer of investment return is emotion. The axiom that fear and greed rule the market is true. Investors should not let fear or greed control their decisions. Instead, they should focus on the bigger picture.

    Stock market returns may deviate wildly over a shorter time frame, but, over the long term, historical returns tend to favor patient investors.

    An investor ruled by emotion may see this type of negative return and panic sell, when in fact they probably would have been better off holding the investment for the long term. In fact, patient investors may benefit from the irrational decisions of other investors.

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