Some lessons are learned the hard way. Unfortunately, some of those painful lessons are learned from investment mistakes that cost money. The good news is that new investors can learn from the mistakes of their forbears so that they don’t repeat them.
Here are 6 common investment mistakes we all make.
1. Focusing on Short Term Losses and Gains
Most asset classes aren’t intended to make you a quick buck. Sure, you can get wind of some good news that a company is about to announce and buy its stock ahead of time. When the news is finally released, you stand to make a nice profit very quickly as the stock increases in value.
Unfortunately, that kind of activity is called insider trading and it’s a crime.
The best thing to do as an investor is to follow tried-and-true principles of investment and let your money appreciate in value over the long haul. You might notice some unrealized losses every now and then as the stock market dips, but over a period of years or decades you should do well.
2. Paying Too Much Attention to the Media
If you’ve watched CNBC for any length of time, then you know that it’s the one place where people can be wrong over and over again and yet still be taken seriously. The fact of the matter is the financial media, with all of its analysts and stock pickers, is known to dispense bad advice. If you hang on to every word that you hear from financial news sources without doing your own research, you risk losing money.
3. Not Rebalancing
When your winners have run their course, it’s time to sell them and buy more of your underperforming assets. That’s often a challenge for new investors, but it pays well when those poorly performing investments turn around and begins increasing in value.
4. Avoiding Index Funds
There are some great mutual fund managers in the financial community. However, many of them fail to make their benchmarks. Sometimes, the best thing to do is to buy an index fund that tracks one of the major indexes (such as the S&P 500 or the Dow Jones Industrial Average). If you’re planning for a very long-term investment and won’t be looking for states to retire in for quite some time, park you money in an index fund and watch it multiply.
5. Chasing Stocks
Sometimes, the stock of a company that you’ve been watching soars dramatically over a short period of time. However, it’s moved well past your target price for purchase.
When that happens resist the temptation to “chase” that stock by buying it at a higher price than you had planned. It could fall again.
6. Neglecting to do Research
Know everything about the companies you plan to invest in. Go over their financial statements while paying particular attention to trends over time. Also, view their key statistics like the debt-to-equity ratio, price-to-earnings ratio, and current ratio. Then, make an informed decision about whether or not you should make the investment.
Everybody makes mistakes. However, you can learn from the mistakes of others so that you don’t repeat them. That’s just as true when it comes to making investments as it is for anything else.
