Investing Mistakes
Investing in stocks is a great way to build your wealth. There are many ways to invest in the market and different strategies to do so. Unfortunately, there are also many mistakes investors make that come with it. Understanding what other investors have done wrong will help you do right for building your wealth and making your money grow.
Mistakes Investors Make #1: Unknown Markets
This is a huge mistake that I see pretty often. New investors are looking for the “get rich quick” stock. They invest in companies they have either never heard of or heard the name, but know nothing about the company. Many times this happens with pharmaceuticals. I’d say most people know about Pfizer. But, do you know what they make besides the vaccine (or Viagra)? Do you know who their main competitors are or where they fall in their market? New investors should look at companies where they know the industries and where they fit in.
Mistakes Investors Make #2: Sell on Market Dips
“Attempt to be fearful when others are greedy and to be greedy only when others are fearful,” Warren Buffett. Market dips are what I call “buying season.” Using dollar cost averaging, buying more shares when the market dips brings down your average cost per share. The markets always go back up, and when it does, your shares will be more profitable. If you would have purchased the S&P 500 ETF (SPY) in March 2020 when it dropped from $337 down to $228 per share, it may have freaked you out. Well, today, SPY is trading today at $438. It has almost doubled in a year and a half. Now imagine you sold at the bottom after buying at the $337 level. You would have lost over $100 a share instead.
Mistakes Investors Make #3: Day-trade Day 1
Day trading seems like the fun, exciting, smart thing to do when you start out. You want to be the Wolf of Wall Street. Maybe, you’ve done research into candlesticks and strategies, and feel you can work the market to make money fast. Unfortunately, there are a lot of things holding you back. First, there are day trade rules that only allow three day trades in a seven day period (for accounts under $25K). So, that holds you back. You also have to pay short-term capital gains tax on your profits, so that may sneak up on you. And, commissions and the spread alone may leave you to making pennies on each trade. Yes, you made 1%, but you only started with $50. Trust me, day trading is more of a headache and is incredibly high stress. Not worth it for beginners.
Mistakes Investors Make #4: No Diversification
Diversification is important for your investments. Starting out, you may not have much money to spread across multiple companies, and that’s ok. But, as you move forward in your investing journey, you want to spread your investments across industries (that you know) to mitigate your portfolio risk and capitalize on the growth of all industries. If a specific market takes a large hit, like home video rentals, the rest of your portfolio can pick up the slack. If you want to start diversifying from day one, consider ETF’s like SPY or QQQ that follow the S&P 500 and NASDAQ accordingly. One share of SPY is like owning 500 companies.
Mistakes Investors Make #5: Ignoring the Numbers
New investors tend to follow emotion over numbers. You heard GameStop is “going to the moon” and you want a piece of that action. But, the company has a negative Earnings Per Share (EPS), one of the key metrics, meaning it’s not profitable. A negative EPS for new companies is typical, but for an established company like GameStop, that’s a good sign of trouble. Social media hype stocks don’t always have the best numbers, but the emotional high of a stock pop pulls many investors in. But, this could happen with any stock. Maybe you found a company that you really want to succeed, but it constantly misses marks. Seasoned investors would cut their losses, while emotional investors ride Blockbuster to the ground.
Conclusion
This is not a comprehensive list. I have made many errors when it came to investing that I hope to never replicate. I get anxious and excited to try new strategies. Often, this can lead to me making what I call “rookie mistakes.” Learn from others who have made mistakes and hopefully history wont repeat itself at your expense.
Disclaimer
Once again, I am not a financial advisor. These tips are some things I have validated with my own personal experiences. If you feel you need more personal advice, please consult a professional financial advisor. Dont forget to check out the Book List for published authors on this topic!
