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Investing Made Easy (Part V): Common Investing Mistakes

oops - MistakesIn this final edition of the Investing Made Easy series, I’d like to detail some common investing mistakes. Investing doesn’t have to be complicated but we make it so by doing some very silly things. In the end, our meddling brings nothing but frustration and lower returns.

I’ve already touched on a few of the most common mistakes in previous articles such as not having a plan, failing to evaluate one’s risk tolerance and ignoring investing fees.  And of course we want to understand every investment into which we place our money. If we don’t understand it, we shouldn’t be investing in it.

I’ve noticed through the years however, that other, less obvious issues inhibit me from having the success I desire. Each of them have hampered my investing at one point or another and it was only through losing money and honestly evaluating myself in the mirror that I was able to overcome them. (“Overcome” is a strong word, because they still creep back up from time to time and I have to fight them off again and again.)

Common Investment Mistakes

Getting Swept Up With Emotion. Stock market action can be volatile. At 10:00 AM on any given morning the market could be up 150 points and by the end of trading at 4:00 PM be down 200 points. String a series of days together with positive price action and euphoria and overconfidence sets in. A series of days with negative price action can lead to misery and doubt.

Fear and greed can drive stock market action. Greed – that we will make millions; fear – that we will lose it all. These emotions are so powerful they literally blind us from making wise decisions. In my investing lifetime, my mind has been engulfed with the cloud of uncertainty these emotions generate. In those moments it’s as though my mind is in a daze  not thinking rationally and certainly not paying attention to investing metrics such as valuation or earnings. I just want in (greed) or I just want out (fear) depending on the circumstance.

For beginning investors, emotions are powerful. For seasoned investors, emotions are powerful. Making investing decisions based on our feelings is dangerous. Learn to control them as much as possible.

The Level of Monitoring. There are two sides to this issue. On the one hand, we have an investor who makes the mistake of neglecting his or her portfolio. They invest in a stock or a mutual fund and don’t look at it for years. They have no idea what’s going on in the fund, what kind of company events are affecting the stock or how the market action is driving the price of their investment. This sounds amusing that someone wouldn’t pay attention to an investment but it happens all the time.

On the other hand, we have the investor who obsesses over each up or down stock tick every day the market is open. They have the financial news on all day. These are the people who have a trading ticker open on their computer’s dashboard at work so just in case something big happens they can make a quick trade over lunch (or on the company clock while their supposed to be making sales calls).

We must maintain a balance of monitoring. I am generally aware of what is going on in the market from day-to-day only because I’m reading news online. I don’t check my portfolio each day to see my gain or loss. Maybe twice a month I’m checking that and only twice a year do I complete a thorough evaluation of my net worth.

Don’t obsess but don’t neglect investments either. Find a place in-between that allows you to stay aware but also have a life.

Taking the Fast Track. It’s hard work and takes time to get rich. Most of us would rather have it happen fast. Come on…be honest. We know this to be true. If you think I’m nuts, answer this simple question, “Would you rather be given a million dollars next week or 10 years from now?” My hand is up for next week. Where do I sign up?

Because we have this feverish desire inside of us, we take unnecessary risks and fall for ridiculous get-rich-quick schemes. Then the risk we took becomes a nightmare when our money disappears as the investment comes crashing down to earth.

Make it a practice to ignore the little get-rich-quick devil sitting on your shoulder whispering sweet nothings into your ear. Consistent, focused discipline over many years is the more tried and true method of producing wealth.

Listening to the Wrong People. Can I beg you to turn off the TV? Why are you pondering the “hot tip” you heard from your best friend’s wife’s racquetball partner? Will you please not take financial advice from your father-in-law who just came out of bankruptcy?

Everyone has an opinion about money and investments. It’s OK to listen and process these opinions but in the end the only one that really matters is our own because we set the investing agenda for our lives. We evaluate our risk. We set our own goals. We place the money down at the investing table. Once our plan is in place and functioning, it makes little sense to divert from that plan because a talking head on TV said the market is overbought and we should take profits. But we do this again and again.

Hold true to your investment philosophy, and only adjust after great study and evaluation. Don’t be swayed by opinion so easily. And remember, the financial media exists to create ratings for their respective networks. There agenda is to get you to watch, so they make EVERY market event seem like it’s the most important one. Keep this in the back of your mind the next time they say the sky is falling. It’s most likely not.

Too Much Diversification and Overlap. I’ve mentioned before that the most basic rule for investing is to keep it simple. For most of us, basic investments in mutual funds, individual stocks, and bonds will get us diversified enough to sleep easy. There are other investments that could bring further diversification such as investing in gold and other commodities, land purchases, or rental real estate. It’s important not to feel pressured to put money into every area possible. One can achieve an appropriate level of diversification by just investing in mutual funds.

Also avoid creating too much overlap by investing in funds that basically hold the same stocks. For example, all the stocks in the Vanguard 500 Index Fund are also in the Vanguard Total Stock Market Index Fund and many are in the Vanguard Large Cap Growth and Income Fund. They are not in the same proportions in each fund but holding all three of these in a portfolio would create significant overlap. Be aware of the basket of stocks that make up a mutual fund by reading the funds prospectus before investing.

Investing comes with a challenging side as you can see in these common mistakes. Be prepared to take the necessary steps to deal with them as they creep up in your life. By doing so, you will greatly increase the chances of having a successful investing career.

What other mistakes do investors make?

Image at FreeDigitalPhotos.net

Next Post: I’m Having a Yak-Attack!

Prior Post: This Little Light of Mine

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Comments

  1. CanadianBudgetBinder says:

    I check to see how our portfolios are doing once month but if we were investing on our own I’d be checking often, I just know it.

    • For those investing for the long-term that’s about all the checking you need to do. I would do at least one indepth overview each year to check if the portfolio needs rebalancing.

  2. I definitely think checking stocks too often can really hurt you long-term. It’s something that I’ve done in the past and I’ve gotten a lot better at it recently.

    • I’ve wasted a lot of time in the past checking stocks multiple times a day, staring at stock tickers. Could have been more productive if I had channeled my energies elsewhere.

  3. MoneySmartGuides says:

    Letting emotion enter into your investing decisions is a certain sign of trouble. It’s not easy to keep it out of your decisions, but the more you can eliminate emotion when making your investment decisions, the more successful you will be in the long run.

    • Sometimes I think I’m the crazy one when everyone around me is panicking as the market tanks and talking about how they are pulling out of stocks I wonder if I’m missing something. Then my cognitive sensibilities kick in and I realize the only thing I would be missing is a buying opportunity.

  4. Common Cents Wealth says:

    These are great tips, Brian! I tend to have a hard time putting emotions aside. I really like “up to the minute” updates and my mood swings with the market. Being that I’m in it for the long-term, I have no idea why I care so much about it now, but I do.

    • Thanks! I understand completely what you are saying. I think it’s fine to stay informed but at what level is the key question. Is it dominating your thinking and taking over other areas of your life? I think I realized I was in too deep when I started making trades on the clock at work. That’s when I decided to dial it back and think more long-term. The short-term trading strategies were disrupting my job and I couldn’t focus.

  5. Great stuff here. I think constant tinkering is definitely a potential pitfall that I have to fight against. Reading up on investing as much as I do, there are always exciting new ideas to think about and potentially explore. I have to resist the urge to try them out unless it becomes something I truly feel can be part of the bedrock of my long-term plan. I’ve finally settled into a plan that I really think will last me many years. As long as I can avoid the temptation to tinker!

    • I’m all for learning new things as an investor but I agree with your assessment…most times we would be fine to leave well enough alone. Investment strategies that are not part of our long-term plan should be avoided.

  6. Awesome post Brian! I agree with all of these. The first one is probably one of the worst. Running your investments with emotion is just going to get you in trouble. Plain and simple!

    • It’s so easy to get caught up in the emotion. Emotions have completely blinded me at times from making wise decisions. I can remember more than once when a stock was plummeting basically saying something like, “Screw it…I’m out!” Twenty minutes after my sale the stock turns around and goes positive. Took a few hard lessons for me to realize that is not the way to successfully invest.

  7. Holly Johnson says:

    I agree with these and that’s why I choose to only monitor our investments from a distance. I don’t want to freak out over little hiccups and fluctuations and find that checking in every few months provides me with a glimpse at the long view.

    • Yes…we need to avoid the “freak out” factor! I’ve been much more inclined to be calm about my investments since I stopped paying attention to them every day and stopped listening to most media outlets.

  8. John S @ Frugal Rules says:

    Good post Brian! I wrote a very similar post several months ago and think you’re spot on! I saw these all too often in my previous job and it just made me shake my head. Another I’d add is not paying attention to fees – whether it be commission price for your stock trades to mutual fund expenses. Over time they can be a massive drag on a portfolio.

    • That’s right John. This is a crucial point for all investors and perhaps more so for those signing up with a financial adviser. It’s important to understand how their fee structure works. You definitely don’t want an adviser who is in and out of investments or selling products all the time so he can generate a commission for himself.

  9. I see people drive their investment decisions on the tax consequences, which is a mistake. It is certainly a good idea to keep in mind the taxes because they should be a part of the decision, but they should not drive the decision.

    • This happens a lot at the end of the year…people getting out of investments so they can file the sale on that year’s taxes. It should definitely be a consideration but not the only one like you said.

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