Let's jump right in to the biggest mistakes investors make while they work to build their own strategy…
Investing mistake #1: Investing without a plan.
You see a lot of people do this where they haven't really identified what the end goal is. Is it retirement, or is it to make more money? Is it to save up for the future, or is it to jump into a higher income bracket now? Depending on what the goals are, your investment strategy will be different. So as an easy example, if you're very close to retirement, you obviously would not want to take on a high level of risk, but if your goal is to get rich quick or improve your income over the next five to ten years, then you will obviously have to focus more on growth and managing your investments every day. So having a plan at the very beginning of your investment strategy is the most important part of succeeding.
Investing mistake #2: Investing on emotions over information.
You get this a lot simply because of all the social media, investing websites, and everything else that you see out there.
The media shares a lot of stock information and a novice investor will hear about Netflix, Amazon, or whatever the hot stock of the day is, and they'll immediately jump in because they're excited or they have had a consumer interaction with the company. But they'll ignore some of the fundamental facts that go on, whether it's PE ratio, debt to equity, earnings growth. They just don't even look into it.
They say, “Hey, I've got Netflix, I love Netflix, he's investing in Netflix. I'm excited about it, let's jump in.” And that's exactly where you can make a costly mistake depending on where that stock is at. Has it been on a three month run where it's very expensive right now? Would taking a step back and waiting for the right opportunity be a better option? Or is it a highly leveraged company with lots of debt that could actually go under? Think of how a company like Blockbuster Video was perceived in the 90's. It is a reminder that investing in emotions over facts is a common mistake investors make.
Investing mistake #3: Not understanding your investments.
I would say this is a very prevalent theme with part-time investors. You see where folks are not looking over the facts and really don't understand exactly what the company does. Sadly, it comes probably more into play when you have retirement accounts and retirement plans through employer benefit programs. Too many people just put money in and you don't even know what it's doing.
They will sign up for a mutual fund that's a southeast Asia eCommerce inex or something. It all sounds good but you don't even really understand what's happening. And in these cases, that can be very dangerous, not only because you could lose money but also because of the opportunity lost. Why invest in something if you don't understand it?
Find someone who can can help walk you through all of your options. There are so many options nowadays. Stick with the markets you know and believe in. At least when people ask you, “Are you ready for retirement? Are you saving towards your goal?” You'll have an answer that makes sense instead of just saying, “I shipped $50,000 over to my employer sponsored program, and it's doing well so far”. That is where a lot of people sit. So dig in, find out exactly what you have, understand what your choices are. Very important stuff.
Investing mistake #4: Following the herd.
The herd mentality is very prevalent across all investing circles, whether it's the daily trades on the stock market, whether it's retirement, savings accounts, recession rumors. Whatever it is, there is always someone who's following the pack. Unfortunately these days, with the way news is a little squishy depending on the source, you have to be very careful with what you're following without asking more questions.
Even simple questions like is a 401K right for me? Is a 529 college savings plan right for me? Those are all things you need to ask yourself. Look at the finer details to see if it matches your family's goals. That goes all the way back to point number one about having a plan. Don't just follow the shiny objects. Figure out what you need to do in order to reach your goals. Many times, the answer will be different than the herd recommends. Everyone has a different situation. Everyone has different income. Household expenses, number of people in their family, all those things impact the choices that you should make as an investor.
Investing mistake #5: Impatience.
You don't have to go very far to see this in the market. Think about all the recession rumors you see in the news today. People are pulling their money out left and right, diving into high dividend stocks because they feel like the crash is right on the way.
The problem with impatience is it usually costs you money. If you're following the herd and hear about Netflix stock rising, you might decide to plow all this money into Netflix stock. Then you get to the point we are at now, where there's recession rumors going on and everybody's running for the hills and they're taking their money out and they're going into bonds and dividend-paying stocks. You see this, but you haven't been in your Netflix long enough to make money yet. Nonetheless, you decide to sell on the dip, locking in a loss on the Netflix investment, and now you are buying the hottest dividend stock even though the price has already jumped to an all-time high.
Every time you hear something going right or wrong, you're a step behind, because if somebody reported it, the market has already reacted and you're a step behind. You're better off picking fundamentally sound investments and riding them out. And as you often hear, if you believe in a company you should buy it when the price is lower.
Don't freak out because Walmart stock went down 20%. If you believe in what Walmart's going to do over the next 10 years, then now's the time to buy more and basically get it on sale. So impatience will absolutely kill you over the long-term, because you'll be losing 20% chunks of your investment every single time. You'll be flipping between stocks, paying fees, and losing money across the board. This behavior might produce small gains across long periods of time, but the amount of money you've given up has cost you valuable compounding interest.
The bottom line here is that all of these investment mistakes are predictable and avoidable. Every investor makes at least one of these errors in their stock market career. The key is to recognize the patterns and avoid temptations.
This post originally appeared as a video on the 40 Finance YouTube Channel