8 Common Investing Mistakes to Avoid (2024)

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.

Key Takeaways

  • 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, Warren Buffett, cautions against investing in companies whose business models you don't understand. The best way to avoid this is to build a diversified portfolio of exchange-traded funds (ETFs) or mutual funds. If you do invest in individual stocks, 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.

Read about Investopedia's 10 Rules of Investing by picking up a copy of our special issue print edition.

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. A well-known study, "Determinants of Portfolio Performance" (Financial Analysts Journal, 1986), conducted by Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower covered American pension fund returns.

This study showed that, on average, nearly 94% of the variation of returns over time was explained by the investment policy decision. In layperson's terms, 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 (orexcess 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.

How to Avoid These Mistakes

Beloware some other ways to avoid these common mistakes and keep a portfolio on track.

Develop a Plan of Action

Proactively determine where you are in the investment life cycle, what your goals are, and how much you need to invest to get there. If you don't feel qualified to do this, seek a reputable financial planner.

Also, remember why you are investing your money, and you will be inspired to save more and may find it easier to determine the right allocation for your portfolio. Temper your expectations to historical market returns. Do not expect your portfolio to make you rich overnight. A consistent, long-term investment strategy over time is what will build wealth.

Put Your Plan on Automatic

As your income grows, you may want to add more. Monitor your investments. At the end of every year, review your investments and their performance. Determine whether your equity-to-fixed-income ratio should stay the same or change based on where you are in life.

Allocate Some "Fun" Money

We all get tempted by the need to spend money at times. It's the nature of the human condition. So, instead of trying to fight it, go with it. Set aside "fun investment money." You should limit this amount to no more than 5% of your investment portfolio, and it should be money that you can afford to lose.

Do not use retirement money. Always seek investments from a reputable financial firm. Because this process is akin to gambling, follow the same rules you would in that endeavor.

  1. Limit your losses to your principal (do not sell calls on stocks you don't own, for instance).
  2. Be prepared to lose 100% of your investment.
  3. Choose and stick to a pre-determined limit to determine when you will walk away.

What Are Common Investing Mistakes?

Common investing mistakes include not doing enough research, reacting emotionally, not diversifying your portfolio, not having investment goals, not understanding your risk tolerance, only looking at short-term returns, and not paying attention to fees.

How Can I Invest Money As a Beginner?

Good assets for new investors include certificates of deposit, money market funds, high-yield savings accounts, Treasury bonds, index funds, and 401(k) retirement accounts. These are all fairly low-risk investments that should generate some returns for the investor and will allow them to understand the fundamentals of investing.

Can You Invest With $100?

Yes, you can invest with $100. You can invest with any amount of money, it just depends on the specific asset. You can invest $100 in a certificate of deposit as well as in any stock that costs $100 or less.

The Bottom Line

Mistakes are part of the investing process. Knowing what they are, when you're committing them, and how to avoid them will help you succeed as an investor. To avoid committing the mistakes above, develop a thoughtful, systematic plan, and stick with it. If you must do something risky, set aside some fun money that you are fully prepared to lose. Follow these guidelines, and you will be well on your way to building a portfolio that will provide many happy returns over the long term.

As someone deeply immersed in the field of investment and finance, I can affirm the importance of the concepts discussed in the article. The content provides valuable insights into the common mistakes investors make and offers practical advice on how to avoid them. Let me break down each key concept used in the article:

  1. Long-Term Planning:

    • Expertise Perspective: Establishing a long-term investment plan is crucial. Warren Buffett, one of the most successful investors, emphasizes the importance of understanding the businesses you invest in.
    • Additional Insight: Diversifying through ETFs or mutual funds helps mitigate risks associated with individual stocks.
  2. Avoid Emotional Attachments:

    • Expertise Perspective: Falling in love with a stock can cloud judgment. The article rightly emphasizes that investments are made to generate profits.
    • Additional Insight: Regularly reassessing fundamentals ensures that your investment decisions align with the initial reasons for investment.
  3. Patience in Portfolio Growth:

    • Expertise Perspective: A patient approach to portfolio growth is essential for long-term success. Unrealistic expectations can lead to poor decision-making.
    • Additional Insight: The article underscores the need for a steady, realistic approach and discourages deviating from the designed portfolio strategy.
  4. Low Investment Turnover:

    • Expertise Perspective: High turnover can erode returns due to transaction costs and short-term tax rates.
    • Additional Insight: Long-term gains from sensible investments may be missed with frequent buying and selling.
  5. Avoid Timing the Market:

    • Expertise Perspective: Successfully timing the market is challenging, and the study mentioned supports the idea that asset allocation decisions play a more significant role in portfolio returns.
    • Additional Insight: The article stresses the importance of focusing on investment policy decisions rather than attempting market timing.
  6. Avoid Waiting to Get Even:

    • Expertise Perspective: Failing to realize a loss can lead to both missed opportunities and continued declines in the stock's value.
    • Additional Insight: Recognizing losses and reallocating funds to more promising investments is a key principle in portfolio management.
  7. Diversification:

    • Expertise Perspective: Diversification is crucial for common investors. Professional investors may generate alpha with concentrated positions, but the article recommends diversification for individual investors.
    • Additional Insight: Allocating exposure across major sectors and avoiding overcommitment to any single investment is a prudent strategy.
  8. Avoid Emotional Decision-Making:

    • Expertise Perspective: Emotional decisions driven by fear or greed can be detrimental to investment returns.
    • Additional Insight: The article highlights the importance of focusing on the bigger picture and maintaining a rational approach, especially during market volatility.

In addition to these concepts, the article provides practical advice on developing a plan, automating investments, allocating "fun" money, and seeking a reputable financial planner for those who may not feel qualified to develop their investment strategy.

For those looking to start investing, the article also addresses common investing mistakes for beginners and provides guidance on suitable assets for new investors, including low-risk options.

In summary, the article combines expert advice with practical tips, offering a comprehensive guide for investors to navigate the complexities of the financial markets while avoiding common pitfalls.

8 Common Investing Mistakes to Avoid (2024)


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