As the saying goes, no one is perfect. That applies in the arena of investing as well.
It’s easy to get tripped up as investing involves money.
I’ve probably lost count of the number of silly mistakes I’ve made over the years.
It’s safe to say that you, dear reader, have probably made your fair share of errors too.
Some may be minor, while others may have lost you a sizable chunk of money.
The important theme here is to recognise the mistake for what it is, learn from it, and (hopefully) not repeat it.
Learning from others’ mistakes is even better, as this means we don’t have to commit it ourselves.
Here are five common mistakes that investors make, and that you should actively try to avoid.
Blindly chasing share prices
The US stock market has, in recent months, been hitting new all-time highs.
Rookie investors are also said to be opening new trading accounts in the US even as the pandemic spreads like wildfire.
As these newbies pile into stocks, share prices are driven to new heights, often without any valid reasons.
It is a classic example of the “Greater Fool” theory, where a buyer of shares believes that he can sell it to the next “fool” who is willing to buy from him at ever-higher prices.
If you participate in this game of musical chairs, it can only end badly when the music stops.
You may be left holding shares at inflated valuations as there was no fundamental reason for the price to keep rising in the first place.
By blindly giving in to greed, you could be setting yourself up for huge losses when the party’s over.
Skipping due diligence
Another common mistake is to commit your hard-earned money to an investment that you did not properly research.
While no one is asking you to become a business analyst overnight, I believe every investor should at least have a basic idea of why he is buying.
Reasons could range from strong financials and a sturdy balance sheet to consistent dividend payments and the presence of clear catalysts for growth.
The bottom line is – ensure that you at least do basic due diligence on a company before you invest in it.
Laziness has often been a recipe for disaster.
Letting emotions overwhelm you
It’s understandable to feel emotional over your investment portfolio.
Not only does it contain a sizable portion of our wealth, but investing is also inextricably tied to our ego.
Yes, you heard me right.
Although many may deny it, our pride can get tied up with whether an investment does well, or ends badly.
The emotions of fear and regret may overwhelm you when things go wrong.
The fear of share prices continuing to plunge may trigger you to sell all your stocks prematurely in the event of a bear market.
Pride may cause you to overlook mistakes and short-cut your investment process, opening yourself to more risks than you should be taking on.
Ultimately, logic and rationality should prevail in investing, rather than emotions.
Throwing good money after bad
Sometimes, no matter how much effort we put in, we end up with a lemon of an investment.
That’s all right, though, as no one is infallible.
However, it becomes a big problem if you should decide to throw good money after bad by doubling down on a lousy business.
The analogy here is that when you’re already trapped in a hole, then you need to stop digging further.
So, if you have identified an investment as being a dud, stop trying to average down.
Throwing good money after bad is a sure-fire way to erode your wealth.
As stubborn as a mule
The business world is a dynamic, ever-changing place.
What’s relevant today may go out of fashion tomorrow.
COVID-19 has dramatically accelerated the pace of change as entire industries fall in and out of favour.
As investors, you should continuously update your views on businesses.
Being stubborn and not admitting that something has changed can have dire consequences for your portfolio.
The world constantly evolves and changes.
As an investor, you should, too.
With share prices battered to multi-year lows, many attractive investment opportunities have emerged. In a special FREE report, we show you 3 stocks that we think will be suitable for our portfolio. Simply click here to scoop up your FREE copy… before the next stock market rally.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
