How to Avoid Common Investment Mistakes
Choosing the right investments is important for long-term financial security. Stock markets are increasingly complex and volatile. In addition, the Internet and 24-hour cable news have meant an explosion of information, which makes it difficult to discern the good information from the bad. By getting rid of certain preconceived notions and doing careful research, you can avoid mistakes and generate higher portfolio returns.
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Invest adequate time in research. Costly errors occur when investors rush to place orders after reading "hot stock tips" on the Internet or watching stock recommendations on business television programs. Take the time to review the financial information on the company's investor relations website. A company with strong fundamentals will be a "hot stock" a week or even a month later.
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Set realistic expectations. Set targets consistent with the long-term average returns of major market indexes. If you set a 25- to 30-percent annual return target for your portfolios, you are setting yourself up for disappointment.
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Avoid the herd mentality. When people are stampeding for the exits, wait for the dust to settle before picking up quality stocks at bargain prices. Conversely, when everyone is piling in, as many were during the dot-com bubble days of the late 1990s, it might be time to get out.
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Stop basing investment decisions on unusual or one-time events. People often place too much reliance on catastrophic events, such as the 2008 financial crisis, and forget that stocks offer the best way to achieve long-term investment returns.
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Set price targets for your stock investments. You can take the uncertainty and emotion out of trading decisions by setting specific price targets. You can use financial price ratios to set price targets. For example, if a stock is trading below its historical price-to-earnings ratio, which is the ratio of the market price to the trailing 12-month price-to-earnings ratio, consider buying the stock. If the price has increased dramatically, it may be time to reduce your holdings.
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Avoid doubling down on your losses, meaning do not keep buying a stock when it is on its way down. Investors are often unable to take a loss and move on.
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Avoid frequent trading. Frequent traders tend to earn less over the long term. They also pay more in commission charges, which reduce investment returns. Small numbers, such as mutual fund expense ratios, tend to add up and negatively affect returns.
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Monitor your investment portfolio. Buy-and-hold investing does not mean buy-and-forget. Corporate restructuring, insider selling and changes in the competitive dynamics are some of the material changes that could alter stock performance.
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References
- "MoneyWeek"; Five Common Investment Mistakes to Avoid; Stephen Bland; May 2008
- "Consumer Reports Money Adviser"; Money Mistakes to Avoid; August 2010
- CBSMoneyWatch.com; Five Dumb Investing Mistakes to Avoid; Gary Belsky; January 2010
- U.S. News & World Report Money; Six Investing Mistakes to Avoid; Roger Wohlner; June 2011
