So how are your investments doing? No, don’t just rattle off a war story about how you picked up shares of that great stock on a dip and sold them the next week for a 10% gain. Don’t talk about how you sold out just before the stock took a big plunge. How are you really doing?
Many people, when they step back and really look at the performance of their investments, will find that their broker is making more money than they are. They will be making trades left and right, feeling like Masters of the Universe, but when it comes down to it a lower return is being made than the return from a money market account. Sometimes, they are making even less. The vast majority of people, mutual fund managers included, would do far better just putting their money in an index fund and forgetting they owned it.
Yet some people do far better than the index funds. Not just a few people, but a lot of people. Despite what some professors at the business schools write in their papers, despite all of the studies that show that the majority of fund managers cannot beat index funds for returns, there are many people who do outperform the index funds and the managed funds.
What is their secret? Do they have an uncanny ability to predict the fluctuations of the market? Do they have contacts that provide them with knowledge that allows them to buy or sell ahead of the crowd? Do they have some sixth sense that allows them to determine which stocks will outperform? Maybe some do have some of these advantages, but the vast majority are just investing differently. They are avoiding some of the common mistakes most investors make.
With some changes to your investing style, you too can improve your performance and make the market beating returns. You can become what I refer to as a “Serious Investor,” rather than someone who is just trading stocks for entertainment. In Las Vegas the person who is serious about making money from gambling will be the guy who buys the casino. If you’d like to get up from the table and move upstairs where the odds are in your favor, you’ll need to change your strategy from that of a trader to that of an investor.
Here are five mistakes that most people make when they are investing in the stock market:
1) Trading based on price. Many people will buy a stock just because it has dropped in price from where it once was. Others may buy a stock simply because it has increased rapidly in price. Some may sell a stock shortly after buying in because the share price drops a bit, thinking that there must be something wrong with the purchase. Good investors use market fluctuations to get better prices when they buy and sell, but never let the price that the market is offering dictate their decisions.
2) Selling winners too soon. Many people sell shares when they gain a percentage above what they paid for the shares. Often stocks that are doing well keep doing well. If one sells stocks when they have moved up a percentage, one will miss out on some big gains.
3) Holding onto losers, waiting to get back to even. This mistake, combined with mistake #2, results in a portfolio full of losers. The notion that one does not suffer a loss until one sells is nonsense. If you would not buy the stock today, you sell, use the loss to offset taxes on gains and some ordinary income, and move the funds into something with a brighter future.
To learn more about how you can use investing to build wealth, check out my first book: SmallIvy Book of Investing: Book1: Investing to Grow Wealthy
4) Buying based on hype. The broadcasters at CBNC, the analyst interviewed by the Wall Street Journal, and that guy named hotdude252 on the Yahoo message boards does not have some great insight that no one else knows about. Even if they did, everyone else watching that broadcast or reading that message board will be buying or selling that stock too, so by the time you put your order in the price will have already adjusted itself to account for whatever news or commentary is out there. Make your decisions based on analysis of company earnings and prospects, not based on what some nameless poster says.
5) Buying too little. This is probably the most common mistake of all. Many people do some great analysis, make good judgements about future trends and pick some great stocks, but then only buy 100 shares or so. When the stock doubles, they may make only a few thousand dollars in a hundred thousand dollar account. While you certainly shouldn’t put more in a single stock than you can afford to lose (because bad things can happen to single stocks very rapidly), make sure that you are putting enough into each position to make a difference when you are right.
Avoid these common mistakes, use a disciplined approach, and keep putting away money regularly into investments and you’ll see your assets grow.
Have a question? Please leave it in a comment. Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI
Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.