Top Investing Mistakes
Investors can sometimes be their own worst enemy, so what are some of the mistakes that investors make? Here we outline our top four.
1. Panic selling
When the market drops severely, it is tempting to sell. Before you do, ask yourself if some part of your investment thesis has changed (e.g. you invested in a company that is now being sued), if so then you should consider selling. If nothing has changed, and your stock is simply down because of market noise, then you may be better off holding on to your stocks.
Investing is a long-term game, if you are investing for the long-term you can ignore short-term market ups and downs.
Just like selling in a panic is bad, holding on to a loser for too long is also bad. In both cases you are allowing emotions to dictate your investment decisions.
Prior to making an investment, have a downward price limit in mind, once it hits this sell, unless there are some very good reasons for holding on to a stock (e.g. an impending takeover / buy out).
In the share market, like in life, you win some you lose some. Cut your losses and move on.
Overly Frequent Trading
The fundamental thesis of points 1 and 2 are to have an investment strategy and stick with it. Following a strategy will ensure that you make rational investment decisions and avoid overly frequent trading.
Trading too often is expensive and will impact your returns. Studies have shown the impact of excessive trading on a portfolio:
- “Trading is hazardous to your wealth”: Found that there is a correlation between active trading and poor investment performance
- “The Common Stock Investment Performance of Individual Investors”: This study examined the performance of day traders. It found that over a 6 month period, 80% of day traders lost money, and ONLY 1% were found to be consistently profitable.
Professional investors have a strategy, and trade only when new information comes to light that changes the strategy. Novice investors trade in and out frequently, with no rationale, and 99% lose money.
One common mistake that novice investors make is to hold only a handful of stocks. This is a very risky strategy and one that is unlikely to perform well in the long-run.
In future posts we’ll go into more detail about constructing an investment portfolio the right way.
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