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Unless you are not human, you will make mistakes. Investors and would-be investors are no different. I have been investing now for just over two years. It hasn’t been until I started this blog that I realized that I was making some mistakes. Being involved in a community that has similar goals with people at different stages of their investment careers has allowed me to take a step back and see what mistakes I was making.
So below is a summary of the 5 most common investing mistakes from yours truly!
No Financial Plan
A financial and investing plan is the foundation of any successful investor. This will be the blueprint that will guide you and provide an outline of when and how you should invest or sellt in an asset.
Yet many investors fail to have a plan in place. Remember that a Financial plan will not be the same for any two people. You must consider your income, the sustainability of your income. Any debts you have amongst many other variables. This plan will always be unique to you!
To compound matters, many investors will fail to evaluate their own risk or worse still not spend the time to really think about how much risk they are undertaking.
How would you feel if you lost 10% of your capital? 50% or even 100% of your capital. Many investors will look at the potential upside but forget to consider how they would feel if they lost all their hard-earned dollars.
A common way to mitigate risk is to diversify your investments. By Asset class and or by geography. We will see later how diversification can help you survive the down days and believe me there will be down days.
https://www.buymeacoffee.com/dividendtalk
Whichever way you look at it, most mistakes can be limited by having a financial plan. If you don’t feel comfortable designing up with one yourself then seek a professional to help you. It will pay you in the long run and prevent some of the common investing mistakes below.
Inappropriate use of Debt
Investing in risk assets like shares and property should be done with surplus savings. Yes, history will tell you that the returns on both have outperformed cash deposits over a long time period. But this is not a guarantee.
I briefly touched on risk in the last section and those who are investing by increasing their debt are simply adding more risk to their investment. there is no point in sugar-coating it.
For example in the early 2000s in Ireland, property was booming. Lots of couples were buying Apartments and houses to rent out. In order to obtain these houses they would have had to take out a second or third mortgage.
Is this an Appropriate use of debt?
One could argue that the rental income from a property is generally stable. Stable income means that you can control the risk. While this is partially true I think the missing ingredient here is value. A lot of these houses were overvalued.
As we saw, most investors borrowed for assets that were overvalued hence they were exposed to a risk they did not fully understand. This meant that lots of investors ended up losing these investments with very little returns when the last property crash happened..
A Lack of Diversification
Hands up. Guilty! I have begun writing a series of posts recently where I am analyzing my portfolio through performance attribution in an attempt to optimize my portfolio. One of my discoveries was that although I have a level of diversification, it was not enough to beat the market.
What is the point in hand picking companies, if you cannot beat the market?
If you are investing in individual companies than diversifying into a selection of companies in different industries or even in different geographical regions can significantly reduce the risks if one of your companies is underperforming or worse going out of business.
My own portfolio is heavily weighted in US equities and cash but in the future I want to diversify my equities across different regions.
For most people this is made possible by investing in ETFs. Ireland does not make this a clear cut choice as you can read here.
Of Course, Diversification across asset classes offers an opportunity to obtain returns that may not be dependant or totally correlated to the economy. Asset classes such as commodities and precious metals can offer you positive returns even when equites and properties are underperforming.
Diversification across asset classes is one of the best ways to mitigate your risk.
You are really a Speculator
This one sits close to my chest. Why? Because in my 20s I chased every way possible to make a quick buck. Gambling, sports trading, roulette, forex. You name it and I probably would have tried it. Do you notice anything with all of these?
They all need constant activity. This is a common trait of a speculator.
The lines between an investor and a speculator can be somewhat blurred. This is because in some cases they may even occupy the same space. But how they go about their business are worlds apart. An investor is someone who owns an assets. They hold on to this asset for a long period of time to take advantage of the likelihood that the asset will appreciate over time.
Speculators don’t have time, they play a zero sum game where they look for gains over a shorter amount of time. They are typically involved in options, spread betting and shorting.
I am sure that there are plenty of people who make plenty of money as a speculator but it is important to categorise yourself correctly.
Obtaining Poor Value
Price is what you pay. Value is what you get.
Warren Buffett
In the US stock market, shares have been valued at a median value of just over 14 times historic earnings over the long term.
S&P 500 PE Ratio – 90 Year Historical Chart
At this valuation, the US stock market delivered returns of 9% . If you pay substantially higher multiple earnings than you risk lower returns on your investment.
S&P 500 Historical Annual Returns
Haphazard approach to investing
Many Investors start in the markets by buying a share without really understanding why they are buying it. Heck as I mentioned before they probably don’t even have a plan or any sort of long term goals.
I have some questions for you.
Did you ever buy a share in a company without knowing why?
Have you ever bought more of a share, simply because you already have them in your portfolio.?
or have you ever bought a share because your friends talk about it or it is all over twitter?
I know that these are common mistakes because I have made them. I would imagine I am not alone either.
By nature, humans are followers. It is this heard instinct that means many investors will invest in the latest and greatest asset class. Usually by the time they get involved it is too late and the return on investment is not what they expected. This risks exposing the investor to speculating or essentially gambling to try and earn the returns that they read about online.
Conclusion
Most of these mistakes can be avoided by having a proper financial plan in place. It is important to not think about getting rich quick but to actually sit down and map out your expectations. How much do you need? How long do you need to invest for? What is your risk profile?
Once you have a goal and understand what you are willing to risk, you can begin to develop an investing plan.
if it seems daunting to begin with I would urge you to seek financial advice, but with a little bit of work and reading you can probably avoid making some of the mistakes I made above.
Thanks for reading and Happy Investing!
In my infancy phase of investing, if I ever left it, I started buying stock and ETF’s I knew nothing about..
I received permissions to a free trading app, which allowed free daily trading. I had no idea what I was doing.
Once I acknowledged that I started to grow and learn. My net worth sky rocketed and I wasn’t shooting myself in the foot anymore.
How about you? What is your hardest lesson learned?
The same, my first stock was Glanbia, I bought the because they were Irish and paid a dividend and no other reason. Iv also bought stocks because I saw it on other threads. Iv soon learned than copying in no good and I had to put in my own work to become successful
Investors that don’t have plans most likely would fail. You have good points and this would definitely help beginners who want to invest!
I’ve been investing for about two years and I definitely need to do more studying. I’m better than I was two years ago.