investing

5 Common Investing Mistakes (Part 1)

May 11th, 2013

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This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.

After you've invested your savings, you'll probably feel a twinge of anxiety. Why wouldn't you? You probably just spent thousands of dollars on something you couldn't see or touch.

I know how you feel, because I've been there myself. I'll make a post about my first experience with investing (and the terrible decisions I made), but not today.

Today, I want to talk about some of the most common mistakes that investors make. Sometimes, the best offense is a great defense. Avoid these mistakes, and you'll do better than most of your fellow Canadians. But enough chit chat. Let's get to it.

  1. Trading too much: After people have invested for a while, they get this itch. They see the stock market swing up and down, and they think to themselves,

    "what if I timed my investment purchases so that I bought them just before it went up, and sold it just before it went down? I'd make even more money"

    So they try. They buy stocks or ETFs one day, and sell it the next day. During one of these tries, they make money, and they're hooked. They think to themselves,

    "See? I knew it! I'm a rock star. I'm the Wayne Gretzky of investing. I've got unlimited potential!".

    They trade everyday, and don't pay attention to all the fees they pay. Studies have shown that most investors would be far better off not trading at all.

  2. Letting emotions dictate decisions:In the late 90s, the internet craze ruled the stock market. Stock of a company went up, just because the company attached ".com" after its name. Ordinary working people quit their jobs to focus solely on playing the stock market.

    Today, we know the epilogue to that story. Those people lost tons of money. It's easy for us to sit here and wag our fingers at them, telling them how foolish they were. However, I'm not sure you'd have been comfortable telling them so during the internet craze.

    Put yourself in their shoes. They saw stocks go up year after year. They felt validated in their beliefs. Studies show that human beings make decisions primarily with their emotions, not their brains, which is why emotions are so hard to resist. To avoid this mistake, one thing you can do is check back to this blog. We'll do our best to keep your feet on the ground.

  3. Not diversifying: The first time somebody told me all they owned was Apple stocks, I nearly fell off my chair. I guessed that this person wasn't putting lunch money in; rather, it was this person's retirement nest egg.

    But this person was not alone.

    To see why this is such a terrible mistake, let me ask you a question. If you had just 5% chance of losing half of your savings, would you invest? If you're a normal person, the answer is no. But this is the kind of situation you put yourself in, if you don't diversify.

    Even if you're the best investor in the world, you simply can't predict all the possible things that can happen to a company. But if you're the average investor, with no training on how to properly analyze a company, diversification becomes doubly important, as it protects you against things you've never thought of.

    That's part of the reason why we recommend ETFs to our members. By investing in an ETF, you're investing in hundreds or even thousands of different stocks and/or bonds. Whether you use MoneyGeek or not, always remember: diversify.

If you can avoid these mistakes, you'll already do better than the average Canadian investor. We will come back in a couple of weeks to complete our list of 5 biggest mistakes investors make. Until then, happy investing.

This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.