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Investment Mistakes To Avoid – Typical Rookie Mistakes

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Introduction

 

 

Sometimes, investors make mistakes. After all, nobody’s perfect. Unfortunately, mistakes in the investing world can cost a lot of money. When losing money on a trade, a small one-time setback is easier to recover from than, say, several large recurring losses. These large losses can prevent you from meeting your financial goals. In many instances, however, these losses are a result of investing mistakes that could have been avoided. In today’s lesson, we will be discussing the investment mistakes to avoid – as learning about these vices can prevent you from making the same mistakes most investors make in the early stages of their investing journey.

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

 

Avoiding Common Investor Pitfalls

 

The first pitfall is falling in love….with a single stock. Now I know that this might sound funny, but some stocks form a cult-like following after a prolonged uptrend – or as a result of a popular product/service.

 

 

The financial media often feeds into a stock frenzy by frequently highlighting price gains or touting a company’s product or service. All this attention pushes the stock price higher, but during the frenzy, some investors lose sight of risk management.

Inevitably, the uptrend will end, and the stock will reverse direction and head down. When the downtrend begins, these investors can experience massive losses.

 

 

The second pitfall investors commonly find themselves in is owning too much of a single stock through an employer-sponsored stock purchase plan or through employer-issued stock options.

If part of your compensation is company stock, then it can be easy to accumulate a large, concentrated stock position. However, this can increase the risk in a portfolio and lead to large losses if the employer stock trends lower.

Before we move on to the final pitfall, lets discuss how you can possibly avoid making these two common mistakes.

The solution is the same for both. Basically, it comes down to investing an appropriate amount in a single stock.

Whether it’s a stock you love, or your employer’s stock, it’s important to maintain balance in your portfolio. Position Sizing is the rule of thumb that perfectly applies here. This is the process of spreading a portfolio equally among individual stocks – and occasionally rebalancing stocks overweight positions.

Rebalancing involves taking partial profits in a stock that’s performed particularly well, and then using the proceeds to reinvest in another stock. This way, you can still consider owning stock you love or your employer stock, but you also help reduce the risk to your portfolio by maintaining appropriately sized positions.

Now on to the third common investing pitfall – setting unrealistic expectations.

 

 

Sometimes, investors start trading with the unrealistic expectation of making extraordinary returns like 50% or even 100% per year.

The truth is these types of returns are very difficult to achieve consistently, if not impossible. Setting such unrealistic
expectations can open the door to excessive risk-taking.

Some investors might try to reach these unrealistic expectations by using a complex trading system without fully understanding how the system works. This can lead to unnecessary losses.

Another way investors fall into this trap is by acting on tips and rumors from friends, financial media, and the internet.

 

 

Trading on tips alone usually leads to losses for most investors. Investors can help stay grounded by having realistic expectations.

For example, stocks have generally returned high single digits per year, such as 6% or 7%, but these returns are not guaranteed.

Stocks can lose money in any given year. Another way to try to avoid setting unrealistic expectations is to create and follow an investing plan. An investing plan defines entry and exit rules and other factors that guide investment decisions.

 

To read more about Investing Plans, check out my Investment Planning post:

Investing With A Plan – Your Investing Playbook

 

Its much easier to be disciplined when you have an investing plan in place – as you’re less likely to rely on complex strategies, tips, and rumors. Following a plan that helps you steer clear of these common investor pitfalls might help you avoid large losses and keep your financial goals on target.

 

Quick Recap

In Review….

 

The 3 Common Stock Investing Mistakes

 

 

  1. Investing in ONE particular stock
  • The financial media often feeds into a stock frenzy by frequently highlighting price gains or touting a company’s product or service
  • All this attention pushes the stock price higher, but during the frenzy, some investors lose sight of risk management
  • Inevitably, the uptrend will end, and the stock will reverse direction and head down. When the downtrend begins, these investors can experience massive losses

2. Acquiring too much Employer- Sponsored Stock

  • If part of your compensation is company stock, then it can be easy to accumulate a large, concentrated stock position. However, this can increase the risk in a portfolio and lead to large losses if the employer stock trends lower

3. Unrealistic Expectations

  • Sometimes, investors start trading with the unrealistic expectation of making extraordinary returns like 50% or even 100% per year
  • The truth is these types of returns are very difficult to achieve consistently, if not impossible. Setting such unrealistic expectations can open the door to excessive risk-taking
  • Some investors might try to reach these unrealistic expectations by using a complex trading system without fully understanding how the system works. This can lead to unnecessary losses
  • Another way investors fall into this trap is by acting on tips and rumors from friends, financial media, and the internet

 

 

 

How To Help Guard Against These Risks

  1. Utilizing Position Sizing – the process of spreading a portfolio equally among individual stocks – and occasionally rebalancing stocks overweight positions
  2. Monitoring & Rebalancing Your Portfolio taking partial profits in a stock that’s performed particularly well, and then using the proceeds to reinvest in another stock. This way, you can still consider owning stock you love or your employer stock, but you also help reduce the risk to your portfolio by maintaining appropriately sized positions
  3. Have A Set Investing Plan In Placedefines entry and exit rules and other factors that guide investment decisions. Its much easier to be disciplined when you have an investing plan in place – as you’re less likely to rely on complex strategies, tips, and rumors. Following a plan that helps you steer clear of these common investor pitfalls might help you avoid large losses and keep your financial goals on target

 

 

And these are the most common diversions that could potentially lead you to financial ruin – by this I mean that you lose all of your invested capital. It is very easy to screw yourself up if you are not careful of the investing decisions that you make. A quote from billionaire investor Warren Buffet elegantly captures the theme of today’s lesson.

 

“It Takes 20 Years To Build A Reputation And 5 Minutes To Ruin It. If You Think About That, You’ll Do Things Differently.”

– Warren Buffet

 

The ways to combat these vices is listed above – and are not quite difficult to do. Remember to always keep your greed in check when it comes to investing – as it can be your worst enemy, prompting you to make rash, irresponsible investing decisions. After all, there is money at stake – YOUR MONEY – but in the same token, the upside potential to investing is infinite. The possibilities are endless – but make sure to always maintain a realistic perspective, and you will reach your financial goals.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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