In a nutshell:
Investing mistakes are common. There are a number of mistakes investors make, including: speculating, not understanding the company, not taking into account fees, buying/selling on emotion, and trying to time the market. Avoid these mistakes!
- Be aware of your mistakes so you don’t make them again
- The best strategy is to invest long-term in the stock market
- Understand what fees you are paying to your broker
- Never try to time the market
- Not understanding the company
- Not taking into account fees
- Timing the market
Whilst there are endless mistakes that we all make when it comes to the stock market, there are some that are more avoidable, and could do more damage, than others. In this post we will be looking at five investing mistakes to avoid.
There are a number of reasons why you should invest. However, make sure you don’t make these mistakes. Although there are other mistakes, these five mistakes are common and important to avoid.
Simply put, speculating is not investing it is gambling!
This is no different than sticking a tenner on a horse. The dot com bubble in the early 2000’s was an example of speculation, as were 3D printers, crypto currencies, and weed stocks, of more recent times. All of these had huge gains, and you could have made a small fortune. However, the reality is that most people invested in these lost their money.
Particularly, ‘hot’ stocks see huge increases in their price before they come crashing down to rock bottom. Whilst speculating is easy and exciting, and there could be place for it, we wouldn’t suggest allocating more than 10-15% of your portfolio towards speculative positions.
In short, if you put money into a company that is hot in the media, and you don’t really understand what you are investing into, accept that you may lose your money.
Not understanding the company
Everyone is guilty of this at one point or another. Maybe a company has been in the media a lot, or you saw a tip for a company on social media, so you go ahead and invest without actually knowing anything about the company.
Before investing, always research the company. Understand what the company does, how it makes money, the industry it operates in, and so on. At the end of the day, it is your money you are investing. Try and have a look through their most recent annual report – does the company have debt? Are they making a profit? How is free cash flow looking? The more you know the better.
When you buy a new pair of trainers, for example, you shop about. Looking at different types of trainers and different retailors. Investing in stocks is no different – look around at different companies, understand what is a good company with a good future and what isn’t, and try to buy them when they are ‘on sale’, like in a recession.
If you don’t understand the company, then it is likely you are speculating. More importantly, the more you understand the company the more chance you have of making money. Particularly if you work in a specific sector or industry, you will have inside knowledge of that sector/industry – you can then use this to your advantage when looking at companies to invest in!
Not taking into account fees is a costly mistake!
Fees erode your returns each year, so you need to know how much you are paying in fees. Fees you can expect include an annual platform fee, an ongoing fee, transaction fees, FX fees, and so on!
For example, we held our ISA with a provider that was costing around 0.78% per year, now our ISA is held with Vanguard and we are only paying 0.39% per year (annual platform fee 0.15% and a global index fund 0.24%). Now, this doesn’t sound like a lot, but over a few decades this will literally save you tens of thousands of pounds, as more and more of your money is being compounded over the years.
Sometimes fees are ‘hidden’ or hard to work out. If you have any doubt either call up the broker’s customer service, or simply choose another broker! You want to know to who, and where, your money is going.
Investing on emotions is another big mistake, which can work when either buying or selling a stock.
Firstly, you may simple just buy a stock because of ‘fear of missing out’ or FOMO. You’re worried you might jump on the train too late; chances are that you’ve missed the surge already and will only incur losses when the stock inevitably falls.
Secondly, you may sell the stock because it dips suddenly because of bad news. Hence, you panic and sell.
Evidently, in either case the wrong decision was made. You want to sell a stock when everyone is buying, and buy the stock when everyone is panicking and selling. The best course of action is to not look at the daily swings of the stock market, but evaluate your stocks periodically, to reduce the chance of buying or selling on emotion!
Investing mistakes, like letting emotion get in the way, can affect your returns over the long term.
Timing the Market
You cannot time the market. Period.
It is impossible to time the market, if you could, or anyone could, we would all be millionaires! Buying and selling in the stock market is done by humans, and humans are irrational. The market could surge 300% tomorrow, and then drop into a recession the day after. No one knows what will happen.
There is a saying:
Time in the market is better the timing the market.
It is much better to be invested in the market, long-term, than moving in and out. The biggest investment banks and best professional investors try to time the market every day and each year, and they fail – so how can you and me even stand a chance of timing the market? On top of that, timing the market consistently and reliably?
Further to this each time you buy and sell you will have to pay commission to a broker. Reduce your stress and fees, invest less, and hold for longer!
These are five of the most important investing mistakes to avoid!