You don’t make investing mistakes because you’re smart, right? Um, ok. Whether you’re a veteran with handling savings and investment decisions or new to the investing world, it pays (literally) to learn, and avoid, investing mistakes that so many others have made before you. So, before you buy your first shares of the next Amazon or Google, check out the nine most common mistakes that investors make:
Jumping on an overhyped stock
Hey, big shot! You got in on that Facebook IPO, didn’t you? Wow, you’re a player! Wait – you really did buy shares of Facebook on the first day they became available? Sorry to hear that. If we learned anything at all from the recent Facebook IPO debacle, it’s that the small retail investor should steer clear of any IPO.
In fact, the more media hype that there is around an IPO, the more wary any potential investor should be. IPOs are “initial public offerings” that mark a private company’s debut on a stock exchange, when the company becomes publicly held. For well-known companies, an IPO can garner significant attention (translation: “hype”) from the media. This is bad for you, the small investor, who probably thinks very little about the stock market at any other time. Let the “big fish” play in the IPO sandbox.
If you’re interested in an individual company stock, invest in it for the long term – and wait until the hype (and the share price fluctuation) dies down. By the way, in case you didn’t know: Facebook shares dropped over 25% in their first two weeks of trading. Be very glad you didn’t get in on this particular IPO, hot shot.
OK, so you own some shares in the Acme MegaFund Value mutual fund, and you also own shares in the HugeCorp Growth mutual fund. You think you’re invested in lots of different companies, don’t you? Think again. Check out the companies that your mutual funds invest in, and you might find that there’s some “overlap”: two very different funds with significant chunks of their portfolios in identical companies.
So, read your mutual fund prospectus. Sure, it’s pretty boring (do so when you’re getting ready for bed, and are having trouble falling asleep). Then you’ll know what companies are being purchased by your funds.
By the way, the only time you should have to read a fund prospectus (yawn) is before you invest in the fund for the first time. After that, you might glance at it once every two years or so to make sure your mutual funds are buying companies you like, and avoiding companies that you don’t care for.
Avoiding international opportunities
It seems that half the countries on the planet are involved in guerrilla conflict, drug smuggling, nuclear weapons testing, and counterfeiting Disney DVDs. Still, even with this cynical view, that means that the other half of the countries around the globe are involved in legitimate trade and possibly on the verge of becoming homes to the next Google or British Petroleum.
Avoid investing in countries outside your own borders at your peril. Most economic growth taking place right now is within countries that may have offered risky investment opportunities not long ago. But times have changed, and just because opium poppies are a major cash crop in Afghanistan doesn’t mean that the next superpowered microchip can’t be developed in Brazil or India.
Too much of your portfolio in one company
Do you have most of your retirement portfolio invested in the company that employs you? You dummy! Sell, sell! Well, ok – at least slowly spread out your investment around a few other companies. What happens if you get laid off? Not only will your biggest source of income disappear, but the company you once worked for might be in trouble. Do you want to be invested in that company? Of course not.
Thinking you can outperm the market when your a newbie
Yeah, sure. You and every other bloke who opens up an online brokerage account and reads a couple of books about “how to get rich in the stock market”. Trust me, odds are that the folks who write books on this type of stuff are getting rich off of their book sales, not their investing prowess.
Highly paid stock traders with skilled research staffs are going to battle against you, the average small investor. Do you think that even they outperform markets on a regular basis?
It’s possible, but it’s not easy. Usually only the most experienced traders can acheive this consistantly. It’s unlikely that u’d be able to acheive this in your first few months of trading.
Avoiding index funds
Why bother investing in “actively managed” funds at all? Good question. Not only do many actively managed funds fail to outperform the markets (see above), they also tend to charge higher fees. And fees, by the way, can really mess up your portfolio growth over the long run.
It pays to find funds with very low fees, and index funds tend to charge the lowest fees of all mutual funds. Index funds are “set it and forget it” funds, which means that they don’t need an overpaid fund manager to maintain them. If you want to be invested in the markets without thinking too much about which mutual funds you should invest in, then simply invest in index funds. Then go take a long nap or grab a beer.
Keeping too much of your portfolio in illiquid investments
What happens when your rusty old clunker finally requires that transmission replacement that you’ve been putting off for the last two years? Homeowner’s insurance won’t pay for the repairs, and you probably won’t be able to cash out of your mutual fund or stock investments in a hurry. So, always keep some cash on hand just for emergencies. Online banks are good for storing money that you might need to transfer to a checking account quickly. It’s normal for a transfer to be completed in two or three business days.
Believing that “the sky is falling!”
There are always a few “gurus” running around yelling: “buy gold and silver because the major world currencies are going to be devalued and the world will end next week!!!” Please. For thousands of years, there have been people running around yelling that the “end is near”.
(Lately, the Mayan Indians are guilty of this, and heck – they aren’t even around any more. Now, that’s influence!) The world won’t end, the sky is still blue (well – usually), and gold and silver probably shouldn’t take up more than 5% of your portfolio.
You’re going to miss out if you avoid buying stocks or mutual funds that invest in growing companies, because you listen to “end is near” precious metals hucksters. The wealthiest folks in the world didn’t get that way by building bomb shelters and stacking gold bars in them.
Failing to consider your own investing personality
Do you like to go bungee jumping? Do you enjoy hanging out with shadowy criminal types who engage in questionable businesses? Or is your idea of a good time a night in front of the T.V. watching “The Bachelorette” reruns?
Take your own personality into account when you choose your investments. Some individuals can handle wild stock price swings better than others, while others like their investments, well – boring. Ideally, you might consider small investments in exciting and “sexy” companies, while keeping big percentages of your portfolio focused on sleep-inducing businesses. And, reconsider your hobbies if “Bachelorette” reruns really are your favorite pastime. You should get out more.
Face it, you’re reading this post, so you’ve learned something, haven’t you? Oh, yes you have, admit it! Click on your RSS feed and add this blog to your list of subscribed blogs. You’ll continue to learn (and slowly build wealth) by becoming a subscriber. You’re welcome.