Common Investing Mistakes to Avoid

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  • Stop comparing yourself to your social media friends.

 

common investing mistakesMy social media accounts are filled of pictures of kids, amazing vacations photos, and then of course various humblebrags.  Everyone seems to have picture perfect lives on social media.  Even some of the negative stuff is usually broadcasted into something comical or positive.  Normally my social media consumption doesn’t affect me or make me envious.  However, I have a couple of social media friends that love to talk about their amazing stock-picking abilities.  

 

They always seem to pick winners.  But they tend to talk about the stock after the fact.  They never say, “I bought Amazon stock today at $900” or “I bought Facebook today at $160.”  It’s always, “I bought Amazon at $250 six years ago.”

 

I wonder how many dogs that they bought along the way to get that one winner.  I have a feeling that their portfolios may not be as grand as they make it appear.

 

So my advice: don’t always believe the hype.

 

  • Create clear investment goals.

 

common investing mistakesMany people think that by picking great stocks or passive index funds, they will become rich overnight.  That’s not exactly how it works.

 

Having your account rise over time is a goal, but it’s not a clear goal.  Set up a plan that allows you to figure out how much you need for retirement.  Then you can work your way backwards into how much the account needs to grow to.

 

In addition, you must understand the risks that are involved with the plan that you put into place.  It’s unrealistic to think that you are going to get 20% returns every year, especially in light of the amount of risk you may undertake.

 

On the other hand, if you try to play it too safe, a savings account may not yield the returns you need.  So, it’s important to have a goal number and then a return that makes you feel comfortable.

 

According to psychology professor Dr. Gail Matthew, by writing your goals down, you are 42% more likely to achieve those goals and dreams.  So grab a pen and a paper, and start writing!

 

  • Don’t put all your eggs in one basket.

 

common investing mistakesI call this the Enron rule.  Many thought that Enron was an indestructible energy company during the dotcom era.  At the time, Enron blew earnings out of the water.  As a result, they actively encouraged their employees to buy up as much stock as possible.  

 

The only problem was they were cooking the books and lying about their profits.  

 

After they unraveled, shareholders lost a ton of money.  Many lost their retirement fortunes because they hadn’t diversified.  

 

Speaking of diversification, do you know why there is such a high turnover on the Forbes Richest People List?  It’s because a lot of rich people have large concentrations in their company.  If/when their company’s stock price goes down, they lose the fortunes that they had amassed.

 

Eike Batista, a Brazilian magnate, was once the 7th richest man in the world.  But when his energy empire collapsed, he nearly lost it all, $19 billion.

 

So putting all your eggs in one basket can make you a lot of wealth at one point, but it can also cause a lot of heartache if you aren’t diversified at all.

 

  • Stop worrying about the short-term.

 

I was once one of those annoying people that checked the stock market multiple times a day to see how my investments were doing.  It was a good feeling when my investments were going up.  When they were going down, I was definitely in a very sour mood.

 

However, I snapped out of it when I realized how much time I was expending by checking.  Plus, I wasn’t even altering the way that I was trading by doing so.

 

One of my favorite quotes from Warren Buffett is, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

 

  • Stop buying at the top and selling at the bottom.

 

common investing mistakesEveryone hears the old adage buy at the bottom and then sell at the top.  The only problem with this is that most people wait for the market to turn around before they start to buy again.  This is oftentimes after the market has recovered, missing out on most of the gains.

 

In contrast, when the market is lousy, people are more likely to shed their holdings thinking that the market will drop even more.  

 

Like I always advocate, stop timing the market.  Buy your position, and then leave it alone.  You’ll do much better in the long-run.

 

  • Stop jumping in and out of stocks.

 

common investing mistakesI use to have this philosophy that I would buy a stock and then sell it as soon as it went up a dollar or two.  It was nerve-racking as I needed to stay close to my computer or phone to make sure that I could put in a trade or see if a trade had executed when I got close.

 

On top of that, I felt miserable when the investment would go down.  

 

It had all the feelings of gambling.  Yet, I honestly didn’t really know what I was doing.  

 

I still remember buying Nvidia stock back in the early 2000s for $27.  It then went on to do a 2 for 1 split and a 3 for 2 split.  Meaning my original investment would have a cost basis of less than $10.  

 

Today, Nvidia is over $150, which would be 1500% on my investment.  In contrast, I walked away with a 3% return on my investment when I sold it after it went up a dollar.  Not my finest moment.

 

  • Fees Matter.

 

Speaking of jumping in and out of stocks, all of those trading fees can really add up over time.  Back in the day, I was paying $10 a trade.  Fees from jumping in and out of the market accumulated very quickly.  

 

simplify finances resources 2017 great expectations financesOne year, I remember noticing that the trade fees nearly equaled the amount that I had made off of the stock.  I had invested all that time and energy and had barely made any money.  Shocking, right?

 

On top of that, I also had a mutual fund that I thought was great, until I started using Personal Capital, which is a free website that analyzes your investments for free.  

 

Don’t believe me?

 

Check out your investment’s performance, and see how much fees can kill your performance.  You could be saving thousands of dollars a year by paying close attention to fees.

 

Once I learned how much the mutual fund fees were hurting me, I opted for passive index funds.  These funds yield a better return for a fraction of the cost.

 

  • Be like Goldilocks, don’t review your performance too little or too much.

 

portfolioIt’s one thing to obsess about your portfolio’s performance, but it’s a whole other story to pay too little attention.  

 

I have known people who haven’t checked their performance for years.  One person in particular trusted his financial advisor deeply.  However, it backfired when this individual actually looked into his portfolio and learned that his financial advisor hadn’t been putting his client’s needs first.  

 

The financial advisor was continually buying financial products that didn’t make sense for this individual.  Unfortunately, the price of those poor decisions ended up costing this client hundreds of thousands of dollars over the years.  

 

  • Stop reacting to the media.

 

It’s easy to get emotional based on external circumstances.

 

My mom asked me the other day what I thought of the rhetoric with North Korea and how it would affect the stock market.  I told her I honestly didn’t know.  However, I wasn’t planning to alter my investment portfolio if things were to happen.

 

History has shown that some sort of conflict can potentially rock the market.  The market always seems to take time to digest the information and later go up over time.  

 

So I told her to tune out the noise and listen to Benjamin Graham.

 

Benjamin Graham is famously quoted as saying, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

 

  • Stop timing the market.

 

rental propertyAs you may have read from a recent post, it’s nearly impossible to perfectly and consistently time the market.  Even seasoned pros have a difficult time doing this, and they spend all their time trying to do so.  

 

I don’t know what I was thinking when I first started out and thought that I could beat the market by timing it.  I only had a fraction of the time and resources that the seasoned pros had.

 

Since then, I have stopped timing the market and am happy to report that my stress levels are down.  I worry less about the market’s behavior and don’t feel the pressing need to determine if now is a good time to buy.

 

  • Do your own research.

 

common investing mistakesI don’t understand the appeal of Jim Cramer or any of the other talking heads on TV.  They scream to “buy buy buy” or “sell sell sell” certain stocks.

 

If I wanted to get yelled at, I’d stay at work.  I don’t need to turn on the TV to hear more screaming.  

 

I’ve had friends’ parents tell me how much they love watching these guys and that they receive all their financial tips from them.  Clearly many people watch this programming as they are high-performing shows.

 

I do know that some people specifically take the opposite action of what Cramer recommends, and they have profited handsomely.  

 

  • Listen to people that you trust.

 

common investing mistakesThis is something that I definitely don’t do enough.  There are times that my wife will feel uneasy about a stock purchase that I’m about to make.  She will let me know of her hesitancy.  The times that I’ve listened to her wisdom, I’ve dodged some really terrible potential trades.

 

On the other hand, the times I failed to heed her advice, I almost always regret it.

 

So I encourage finding someone that you trust to bounce different ideas off of before you execute on a trade.

 

  • Watch for falling knives.

 

common investing mistakesI am guilty of experiencing this one.  When a stock is going down in a hurry, you may think that it has great value potential.  

 

Watch out!

 

This was the case with Chipotle, after the E. coli crisis.  I thought it was a great opportunity to buy a solid company. I assumed they would quickly get over the scare and put all of that mess behind them, like so many other companies have done in the past.

 

Boy, was I wrong.

 

It seems like Chipotle can’t catch a break.  Unfortunately from my market research, people are clearly eating elsewhere.  I really shouldn’t be surprised as the stock continues to trend down.  The whole situation taught me how it isn’t always wise to buy individual stocks.

 

So readers, do you have any other investing tips?  Share some of your common investing mistakes below.

Mustard Seed Money

Welcome to the website. A mustard seed is a very small seed but astonishingly grows very large over time. My hope is that through your financial journey that your small investment in time, money and faith will grow beyond anything that you could ever imagine.

65 Comments

  1. All great advices. The hardest thing for most investors might be filtering out the outside noise. It might be worthwhile to write down a clear plan before buying any stock. Like I’m buying this because xxx and will only sell if yyy. I’m sure nobody would write down things like “because I read it on Yahoo Finance” 🙂
    Roadrunner recently posted…Our First Rental Property – SelectionMy Profile

    • This is definitely the most difficult thing for me. For a while, I was so confused about what I should be investing in and how I made that decision. There were so many people (friends, family, bloggers, finance gurus, etc) saying different things. Eventually, I got to a point where I knew who to listen to and who not to.

      • It’s difficult to figure out who to trust along the way. I have a friend who’s dad gives awful advice but it took them awhile to figure out that they had no idea what they were talking about until it was almost too late. Which is unfortunate.

  2. I disagree on two of your points.

    One, you mention that you don’t know why people watch Jim Cramer. His show has evolved over the years from a purely stock picking show to becoming more educational. He gives out a lot of advice like you have mentioned in this post. Also, he is very good with the stocks that he has been following steadily for years. I tend to ignore his advice on new stocks or stocks out of his or my areas of expertise.

    Two, you mention that you don’t trust individual stocks because they can go down so steadily. I hear you about Chipotle. I owned it the first time it fell dramatically because of poor performance several years ago. I also got burned with some stocks during the Great Recession that kept falling. However, eventually most stocks tend to recover. In my examples, Chipotle and the stocks from the Great Recession ended up recovering. You’re only going to be average if you invest solely in index funds. Individual stocks provide the opportunity to potentially perform above average. Obviously there are higher risks. Higher risks bring higher rewards.
    Jeff @ Maximum Cents recently posted…Join Maximum Cents On Facebook and TwitterMy Profile

    • Thanks for sharing Jeff!!! You provide a great perspective. I seem to be part of the crowd that under performs to the crowd that over performs 🙂 Average for me is much better than below average at this point 🙂

  3. Excellent summary of what we should do versus what we do. Knowing them helps. Doing them is even better. Some of them I know about, but still do. Why did I buy stocks in 2007, but not in 2009? It was all emotional response – mid-brain ruled my fore-brain.

  4. I generally don’t invest in individual stocks anymore. I just lazily invest in low-cost index funds.

    But if I did I would have made the same mistake with Chipotle that you did. It seemed like a solid stock facing a temporary crisis. They just can’t stop shooting themselves in the foot.
    Mr. Freaky Frugal recently posted…To budget or not to budget?My Profile

    • I thought when they had the crisis that they would get more focused. Start offering breakfast burritos, add a couple of other restaurants under the parents company like pizza and asian fusion. Clearly I thought too highly of where they could go.

  5. One of my investment mistakes is to sometimes double down of stocks as it went down and made that stock position a larger weighting in my portfolio. Sometimes it works and I would trim the stock weighting back to a percentage of my portfolio that I am comfortable with.

    At other times, it worked against me and that stock will sit in my portfolio and pull down my performance. The lesson is to set your investment strategy and to stick to it.
    Leo T. Ly @ isaved5k.com recently posted…Everyday Personal Finance ConceptsMy Profile

    • Thanks Leo!!! I have been fortunate not to throw more good money at bad performing stocks, even when I’m tempted to. I figure if my analysis was right it would have gone up in the first place 🙂

    • Thanks Dave!!! I am definitely disappointed in Chipotle. I thought for sure I had a winner, although I don’t feel that bad. Bill Ackerman, the activist investor, had the same line of thinking as me 🙂

  6. I like your points, good advice. I see it quite similar:
    Buy solid stocks you like and understand, stick to them over the long term, reinvest dividends and put new funds to work regularly and let the companies and the compound effect do their work. Don’t chase high yields nor superior performance, just stay the course and switch off the noise. Over the long term a well diversified portfolio will be doing fine.
    Cheers
    Financial Shaper

    • Thanks for stopping by Financial Shaper!!! Buying how quality, blue chip stocks is definitely not a bad way to go. I have a friend that decided to buy the FANG stocks early on and has done quite well for himself 🙂

  7. All great points. And I think everyone makes a few of those mistakes early on in their investing careers. But they are good life lessons to have. If we didn’t make mistakes to learn from them, we would just keep making them. I would also add don’t chase yield. Those stocks seem to be debt heavy and won’t last for the long term. Reacting to the media is fun when you do the opposite of what everyone else does. Take advantage of those big dips to start a new position or lower your cost basis. I know people who sit on idle cash just for those circumstances.
    Dividend Daze recently posted…8 Mistakes to Avoid When Buying a Used CarMy Profile

    • Thanks for sharing!!! I have found that a lot of people that say they’re going to buy on the dip never do. They keep thinking that they’ll buy when it goes further down. If you’re disciplined I definitely think it can work out, but unfortunately I think it’s rare.

  8. Investing is such a interesting subject in personal finance. Personally I have a finance degree and MBA so of course I thought i could beat the market (roll eyes here). I spent the first 3 years or so in my IRA and 401k trying to read and pick the best stocks. STILL TO THIS DAY I am behind in my returns from that fiasco. Starting about 3 years ago I allocate all of our funds to a index fund and let it ride. I still kick myself for doing all of that trading and reading only to generate very subpar returns. But you gotta pay for your education somehow right?

    Great post. I enjoy reading things that remind me to stay the course.

    • Thanks for sharing Justin!!! Sounds like we have similar backgrounds. I too have a finance degree and MBA and was overconfident in my abilities to beat the market. I guess that’s why you live and learn 🙂

  9. Sage advice…set it and forget it is a good way to invest. Or keep it simple stupid. Both bits of advice hold a lot of truth to them. I have 4 index funds in my 401k and a S and P index fund for my Roth. That is it. I balance out my allocations about every 4 months. Other than that I just sit back and don’t worry about the accounts.
    Dads Dollars Debts recently posted…Hump day- August 16, 2017My Profile

  10. Great tips Rob. I’ll respectfully disagree with Jeff above and his concern with two of the points. Study after study contradicts his perspective. Sure, some people can handle it, but the reality is that most can’t. And “average” market returns would be WAY better than most people are getting right now. The average investOR is lagging the average investMENT by several percentage points each year (CAGR). Reaching average returns would be a huge win for many.
    Brad – MaximizeYourMoney.com recently posted…The One-Page Financial PlanMy Profile

    • “Most people” probably go after penny stocks or stocks with high valuations. I am talking about investing in a small basket of good companies. Here’s a random example of a well diversified basket: Berkshire, Apple, Visa, Facebook, Starbucks. You should be able to buy those and hold for a decade and beat the S&P 500. Since these companies are better than their peers they should result in higher gains over time. If you really want to make big money, buy those stocks when the whole market is down.
      Jeff @ Maximum Cents recently posted…How Long Does It Take To Become A Millionaire?My Profile

      • Thanks for sharing your perspective Jeff!!! It will be fun to watch those stocks in the future and see how they continue to perform. They are definitely leaders in their industry and don’t look like they should be disrupted any time soon 🙂

    • At this point I’m just striving to be average. I’m unfortunately not blessed with the insight of Warren Buffett to be above average or exceptional 🙂 As much as I’d like to be!!!

  11. Good points all. I think almost everyone should have a run at owning individual stocks, if nothing else for them to realize that the index funds they generally favor are full of real-life individual stocks! Getting your lumps with stock picking can make you favor indexing, but it’s a shades of gray thing rather than black and white.
    Paul recently posted…My Net Worth RevealedMy Profile

    • Thanks for sharing Paul!!! That’s a great perspective to have. Maybe dabble with a bit of stocks to see how well you really do and then you can fully appreciate the advice around index funds 🙂

  12. I’ve been victim to the falling knives with UAA. It hasn’t recovers from a bad earnings report a couple of quarters ago. Of course i bought it in the $30 range, but I plan to be in it long term and need to stop myself from checking it every couple of weeks (your other point of Stop worrying about the short-term) 🙂
    SMM recently posted…How Much Cash Should I Carry?My Profile

    • I told myself I was going to avoid retail and restaurants when I first started investing. I held off until I bought Chipotle. I wish I had stuck to my guns 🙂

  13. Great tips! Love the one on social media, I “unfollowed” everyone on Facebook except for my blogging course. I’m still friends with them, and can check people’s pages if I’m curious, but it doesn’t clog my newsfeed. Makes things far more productive.

    To your list I would add is – “Never invest in something you don’t understand.” If the person selling it to you can’t explain it to you, or you can’t research it sufficiently yourself, you’re likely to react badly to volatility and hurt yourself long term.
    Chelsea @ Mama Fish Saves recently posted…Whole vs. Term Life Insurance: Let’s Do the Math!My Profile

    • Great tip Chelsea!!! I definitely should have added that one as it 100% correct. I can’t even name the number of stocks I passed up along the way because I couldn’t wrap my head around things. Some of worked out well when I avoided them, SNAP, others not so much FB 🙂

  14. Good pointers. Many folks are knee jerk reactors to buying or selling. There hear, see, or read something about a stock and take immediate actions, with no thought or research of their own. I like the set it and forget it approach. That said, I do have 15 individual stocks that I own. Most being long time, large companies with strong market performance and good paying dividends.
    fibythecommonguy recently posted…Net Worth Update #4 – July ’17My Profile

    • Sounds like you have bought some solid companies over the years to build up your portfolio. I’m guessing that you’ve done pretty well and that’s awesome to hear!!!

    • Thanks for sharing Gary!!! I have definitely had some friends that confessed they were way too conservative early on in their careers. Definitely have to take some risks with equities to grow 🙂

  15. Spot on MSM! Like yourself I have found that the drain on my brain with the trackers is virtually zero – I buy and forget about it!
    Fortunately I dont have any friends who are as in to their investments as much as I am (I had one who has since moved overseas and who’s every recommendation or suggestion tanked – I am glad I only once listened – I learnt fast!)
    I am also happy (proud almost?) to admit the ones that did badly, after all thats how you learn.
    I will always be guilt of trading and trying to time the market, but I am reducing the percentage of my portfolio that I allow myself to do that with, so hopefully I can sleep better at night!
    Cheers,
    FiL
    FIREin’ London recently posted…July ’17 – Go T’ Pub PerformanceMy Profile

    • Thanks for sharing FIREin’ London!!! I definitely think if you have the trading bug that it’s good to make it a small percentage of your portfolio. Otherwise you can definitely get burned and hurt you in the long run 🙂

  16. The first one is the best, Facebook is a dangerous trap because it only shows what people want you yo see. It’s easy to get caught up in feelings of jealousy at what they have and you don’t, until you realize that they’re probably looking at other people with the same envy because life is never as perfect as they make it look on Facebook.
    Mike – Wealthy Turtle recently posted…Is The Costco Membership Fee A Bargain Or A Scam?My Profile

    • Thanks Mike!!! I have to admit it took me awhile to figure out that my friends weren’t having as much fun as I thought. Being an introvert that doesn’t love going out I definitely didn’t realize how much time was being spent crafting the perfect life. It’s kinda sad when you think about it.

  17. Awesome post, with a lot of great points. While we still do pick individual stocks, we follow many of the rules you have listed above. Some of my favorites are stop reacting to the media and stop worrying about the short term. We are long term investors with long term goals so we try to built our portfolio with investments that will produce good returns for as long as possible. This ties in to the point on the media. Many people will hear a news story or a headline and overreact even if they are investing for the long term. Doing your own research and getting comfortable with the valuation of the stock should be the reason you are buying or selling it, not because a new headline came out. That’s not to say that headlines and news wont drive the price of the stock, as people react to that headlines the price will move, but if you are comfortable with your research and reasons for owning the stock that’s all that matters.
    Courtney @ Your Average Dough recently posted…7 Easy Ways to Save Money Each MonthMy Profile

    • Thanks for sharing Courtney!!! When I did research I always liked to read the contrarian point of view on the stock. It helped see how firm I was on a position 🙂 It definitely talked me out of a lot of stocks that I thought were solid.

  18. Rob great tips. Jim Cramer is a waste of time. He’s entertaining though, I’ll give him that. I remember reading somewhere back-testing Jim Cramer’s stock picks that me makes on his show, and the vast majority didn’t do well. We have similar styles of investing. I don’t believe in market timing either. And I aim for average, because I can’t stock pick. I think the only variance I have with a lot of others is that I do like to tilt towards lower valuation markets.

    • Thanks for sharing Tim!!! I think if I had more time I would try to do more of that type of analysis. Honestly, my brain doesn’t have much more capacity so I am throwing my market in every two weeks and then not worrying about it. But if I get more time, I’d love to explore it more 🙂

  19. Sound advice Rob. I like how the media reacts when stocks are going down drastically especially in 2008. They would run stories of how you should sell your stocks because the market is falling. Its like they want investors to lose out just sell so they can cut their losses. Don’t they know that the market will go back up and all you have to do is be patient. Just ignore the outside noise
    Kris recently posted…10 Free Things to do in San FranciscoMy Profile

    • Thanks for sharing Turning Point Money!!! I definitely agree that I like to hold a few more than 20 stocks but not too much more than that. Although I really like owning index funds the most!!!

  20. Great advice all around Mustard Seed Money. Here is my summary from the investing points. Think long term with investing and focus on buying good companies that have a record of sustaining success over the long term. It typically all boils down to that in my opinion. Buying great, but coring companies, will allow you to look past the noise of a trade deal being announced, a missed quarterly earnings, or some other blip on the radar. It is very difficult to do (especially based on your point about social media and people talking about picking winners), but the key is to be comfortable with how YOU invest and that your strategy will work for you.

    I hate having stock conversations with my co-workers. It is exactly how you described it. Love talking about the winners, never talk about the losers. When you peel back the layers of their investment, there is not fundamental analysis whatsoever. Rather, they are quick to highlight what show they watched or which person they talked to when figuring out which company to buy.

    Thanks for the great read!

    Bert
    Dividend Diplomats recently posted…Dividend Investing to Take Back ControlMy Profile

    • Thanks for stopping by Bert!!! I definitely agree if you have a plan of attack with your investments and buying stocks, it can make a ton of sense. I’ve found too many people have no idea what they’re doing and spout off the first headline that they read confirming their underlying bias. It’s really unfortunate.

  21. The best advice to me is : do not compare to others! figure out yourself what you like and dislike. And understand that others will post on facebook only sucess things they like and love, the success. Keep that in :ind and hapiness will be one big step closer. And is that not the real goal?

  22. Great tips!
    I don’t think I have any tips to add because you got everything covered. With that said, I especially agree with your first 2 tips. I’ve known people that always seem to make a lot of money on stocks too. They always talk about it after the fact just like you mentioned. I always go by the old saying: “If it’s too good to be true, it usually is”. Also, I think your point about having a clear cut goal is extremely important. I think a lot of people don’t end up saving at all because they don’t have goals with their money or know what’s possible from saving. Once you know what you’re working towards, it’s easier to find motivation to save. Thanks for sharing!
    Graham @ Reverse The Crush recently posted…My worst investing mistakes, EVERMy Profile

    • Thanks for stopping by Graham!!! I definitely agree that it’s hard to move forward without goals. I know once I paid off my mortgage that I felt a bit lost. Still trying to reframe my goals but I’m getting better.

  23. Thanks for the advice. I like your sentence Stop comparing yourself to your social media friends. it is the big problem in today trends. it’s really helpful for me.

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