Nobody is flawless when it comes to investing. We will all have our ups and downs, especially when it comes to investing. However, some of the mistakes you may make when trading stocks are fairly common and are not limited to you alone. The vast majority of investors commit many of the following errors.
The good news is that most of these errors can be avoided simply by being aware. We’ll look at the top ten most common mistakes and identify ways to break the habits—or even turn them to your advantage.
Choosing not to Invest
The most common mistake that beginner investors make on their investing journey is not investing. Retirement is costly, and most of us will not be able to save enough without a lot of help from the stock market.
Consider saving $250 per month from the age of 25 to the age of 65. If you keep that money in a bank account that does not earn interest, you will only have $120,000 when you retire. Unfortunately, that isn’t going to last long.
Consider investing that money in the stock market and allowing it to compound, you earned interest on your interest. The stock market has had an average annual return of about 10%, according to the Securities and Exchange Commission (SEC). 1
Your $250 monthly contribution would amount to more than $1.4 million by the time you retire. If you put the same amount of money into the stock market instead of a savings account that doesn’t earn interest, it would grow much faster.
Investing in Companies You Don’t Understand
Another mistake is when investors flock to the latest “hot” industry but know very little about the company or industry. If you don’t do enough research, you could lose your hard-earned money, especially if you don’t know if the company is financially stable. When you research and understand a company and its industry, you have a natural advantage over most other investors.
Putting all your eggs in a single basket
When you put all of your eggs in one basket, a single negative event can devastate your entire portfolio and, as a result, your financial future. Diversifying your portfolio reduces risk by ensuring that if one of your investments underperforms, it will not necessarily have an impact on your entire portfolio.
You can spread your risk across different types of assets by putting some of your money into stocks, bonds, and real estate. If the stock market crashes, for example, the bond market may perform well, reducing your equity losses. Investing in multiple companies within the same industry is another way to diversify. You can also buy several sector funds, each of which focuses on a different industry, such as technology or finance.
Overestimation of the Stock
Another common investing blunder is expecting too much from a stock, which is especially true when purchasing penny stocks. Low-cost stocks might look like lottery tickets because $500 or $2,000 could turn into a small fortune if you buy them. However, penny stocks carry a high risk of loss, and investors who expect a small, underperforming company to outperform its peers may be disappointed. It is important to have a realistic idea of how the company’s shares will do.
Putting money at risk that you can’t afford to lose
When you invest money that you cannot afford to lose, your emotions and stress levels rise, leading to poor and rash investment decisions. Think about how willing you are to lose some or all of your initial investment in exchange for higher returns when you look at stocks. When figuring out how much risk you are willing to take, think about the securities or asset classes you are most comfortable with, such as growth stocks or bonds.
Don’t put money at risks, such as your rent or emergency savings, into investments. By investing money that you can afford to lose, you will make much better investment decisions.
Being Motivated by Impatience
Another common investing blunder is a lack of patience. Stocks may not produce the desired returns right away if you are investing for the long term.
If a company’s management team announces a new strategy, it may take months or years for that strategy to be implemented. Too often, investors will purchase stock and then expect the stock to act in their best interests.
Between 2000 and 2021, the S& P 500 index, for example, delivered an average annual return of 9.01%. This includes several years with negative returns, including the Great Recession of 2008, when the index fell by 36.5%.
The Wrong Places to Learn About Stocks
Another common and costly investing mistake is getting stock tips or information from the wrong sources. There is no shortage of so-called experts willing to offer their views while presenting them as educated and infallibly correct.
Even stock analysts who work for investment firms make mistakes despite having a thorough understanding of the company and the industry they cover. In other words, even if they are qualified to express an opinion, they can be incorrect.
For general investment advice or guidance, government-backed sources and nonprofit organizations are a good place to start. You could also seek the advice of a financial advisor to help you through the process.
Going with the Flow
Following the crowd is another investing blunder because it does not require research and instead mimics what other investors are doing. Many people learn about an investment only after it has performed well. When the price of stock doubles or triples, the mainstream media usually covers it as a hot take.
Regrettably, by the time the media gets involved, the stock may have peaked. At that point, the investment is almost certainly overpriced. Nonetheless, television, newspapers, and the internet (including social media) have the potential to drive stocks into excessively overvalued territory.
The Sunk Cost Fallacy and Averaging Down
When it comes to investing, averaging down can be a costly mistake. Averaging down is typically used by investors who have already made a mistake and need to cover their losses. For example, if they purchased the stock at $3.50 and it drops to $1.75, they may be able to cover their losses by purchasing more shares at a lower price.
As a result of buying the stock at $3.50 and more at $1.75, their average price per share is much lower, making their loss appear much smaller than it is. However, by purchasing more shares that have fallen in value, you are sinking more money into a losing trade, which is why averaging down is also known as throwing good money after bad. Averaging down is a symptom of what is known as the sunk cost fallacy. This happens when a person is hesitant to change a particular behavior or belief because they have already invested so much time, money, or energy in that behavior or belief.
In contrast, an effective strategy is to average up, which is when you buy more shares after the stock price has risen, confirming that you made the right decision.
Failure to Perform Due Diligence
When it comes to investing, failing to conduct due diligence can be a costly mistake. Due diligence is carried out regularly by venture capitalists and investment funds to ensure that their investments are worthwhile. According to the Global Impact Investing Network, organizations that have a predetermined due diligence strategy are less likely to be caught off guard and make well-informed investment decisions. 3
Individual investors should exercise caution when dealing with highly speculative and volatile penny stock shares. Generally, the more due diligence you conduct, the better your investment results will be. You are much less likely to be negatively surprised by an event if you have reviewed the company, including any warning signs and potential risks.
Ideally, you won’t make too many of these common mistakes. However, some of the mistakes we’ve discussed will be made by investors. Fortunately, you can channel your inner adolescent and learn from your mistakes. The majority of people learn more from their losses than from their wins.
With enough time and experience, you will almost certainly be in a better and more profitable position. Ideally, you want to eliminate common mistakes quickly enough that you still have funds to invest.