I’ve worked in finance for more than seven years. I’ve seen investors make hundreds of mistakes. Here are 15 of the most common ones (You’ve likely done at least two of these), remarks Gav Blaxberg, CEO of Wolf Financial.
1. They invest on emotion – You shouldn't sell just because a stock’s price falls. You shouldn't buy just because a stock’s price rises. Invest based on the company’s performance, not the stock’s price movement. The stock market is volatile short term, but long term it goes up.
2. They don’t understand their time horizon – If you don’t need the money for at least 10 years, it shouldn’t matter what stocks are doing today. If you need the money in less than 10 years, you shouldn’t be 100% in stocks. Find out when you need the money and invest with that in mind.
3. They don’t understand their risk tolerance – There are many factors that affect risk tolerance: Age - Time - Income - Obligations. If you have a low risk tolerance, you should take on less risk. If you have a high risk tolerance, you can take on more risk.
4. They follow the herd – Just because lots of people are investing in a stock doesn’t make it a good investment. And just because someone researched an investment doesn’t mean you should base your investment off their research. This is how bubbles and crashes happen.
5. They chase performance – When a stock does well in the short term, it tells you one thing: The stock already did well. But there’s also one thing it doesn’t show you: Whether it will continue to do well. Short-term performance is not indicative of long-term returns.
6. They’re impatient – If your goal is to build wealth, you need to understand one thing: It is a marathon, not a sprint. If you’re in your 20s, you have over 40 years to invest. Instead of trying to get rich quickly, you should let time do all the heavy lifting.
7. They don’t diversify – Your risk shouldn't be concentrated in a single fund or company. Diversification spreads that risk so the odds of losing money decrease. If you pick individual stocks, aim for 10-20 stocks. If you invest in index funds, aim for one to seven funds.
8. They don’t invest long term – It’s okay to invest short term. I do it myself. But the problem is not having a long-term portfolio to build wealth. Short-term investments make money, but long-term investments build wealth.
9. They invest money they need – If you need the money in the next five years, don’t put it all in stocks. If you need the money in 5-10 years, you can invest most of it. But you must be okay with letting it sit if the market falls. This saves you money and preserves your capital.
10. They invest when they’re not ready – You don’t need to be an expert to invest. But you need to know what you’re doing. If you’re a beginner, avoid: Options - Day trading - Penny stocks. And have an emergency fund and no credit card debt. You’re good to go.
11. They stress about what they can’t control – When you stress about your investments, you’ll act irrationally. You’ll sell at a loss. You’ll buy a stock after its run up. Or you won’t invest altogether. Instead, accept you can’t control what the market does day to day.
12. They focus on the wrong type of performance – Short-term performance doesn’t dictate long-term performance. Focus less on the short term, and more on the long term. Because in the short term, the market goes up and down. But long term it mostly goes up.
13. They're glued to the markets – You're anxious because you always look at your portfolio. You become sensitive to every drop in price. Only look at your portfolio when you have a plan. If you’re not buying/selling, there’s no reason to check on it.
14. They delay investing altogether – I’ve heard countless stories of people who waited on the sidelines before they actually started investing. They wanted to know “enough.” Enough comes sooner than you think. Don’t let it stop you from investing outright.
15. They chase dividend yields – A high dividend yield does not automatically indicate a high-quality stock. Instead of focusing on how high the dividend is, focus on how long the dividend has been paid.
There you have it! Fifteen of the most common mistakes investors make. These are holding you back from reaching your potential.
