6 Common Mistakes That Investors Make and End Up Losing Money
Everyone wishes to make successful investments and turn their initial capital into significant wealth, like Warren Buffet and others of his ranking. Unfortunately, most people who make investments end up worse-off than they were before they invested. Does this mean that investing is so complex a task for the average Joe? The answer is No! Anyone can be a successful investor provided you don’t fall in the pitfalls that most investors find themselves in. To make this issue clearer for you, let’s go through 6 common mistakes that investors make and end up losing money.
These 6 were mentioned by @jrewing in the Hashtag Investing chat community.
Being too emotional
One of the mistakes that most investors make is to be too emotional with their money. This leads them to make irrational decisions such as selling when the market is low and buying when it’s at its peak. But why do emotions play a role in investments? It’s because most people over leverage themselves, which has a direct emotional effect on how they manage their investments. Take for example an individual who takes 100% of their net-worth and buys a good stock on the S&P 500. While their analysis and decision to buy may be the right one, if such a stock corrects, as is common in the stock markets, such a person will instantly want to sell. Their decision would be out of the emotional fear that if the stock falls further, they might lose everything they have. Successful investors invest what they can afford to lose, and have no emotional attachment to their money. In fact, Warren Buffet, one of the world’s most successful investors always says that if you cannot comfortably watch your investment lose 50% of its value, then you have no business putting your money in the stock markets.
Obsessing over 1-2 investments such as a stocks, sectors, commodities & not being diversified enough
Most people make the mistake of obsessing over one investment that they end up missing out on profitable opportunities elsewhere. Obsessing over one investment category also leads them to double down on it, and in the unfortunate scenario that it doesn’t work out, they lose a significant chunk of their net worth. To put this context, let’s go back to the 1990's during the dot com bubble. Most investors were so obsessed with tech stocks that they over exposed their portfolios to this sector. When it collapsed, many of them never recovered. Smart investors know that in the markets, anything can happen and that it is always wise to diversify one’s portfolio.
Holding one investment for too long for emotional reasons
Many investors buy into an investment and hold on to it for so long that they lose all their gains to market cycles. While successful investors like Warren Buffet have their favorite stocks that they hold on to for decades, it is important to remember that they don’t do so for emotional reasons. Buffet for example has held on to Coca Cola since the early days of Berkshire Hathaway’s. But that’s because the stock makes financial sense to hold. That’s not the same as people who bought gold in 2009 on the emotional believe that it is the greatest investment out there to protect yourself from “crooked wall street.” Such people failed to sell their gold holdings at its peak, and have watched its prices collapse as the global economy stabilizes and money moves back to the stock markets.
Selling too early
Just like emotionally holding an investment for too long is an investment mistake, getting out too early is a mistake too. That’s because you deny yourself the chance to take advantage of the gains that can accrue if you had held for longer. In most cases, people get out too early due to emotional reasons. They fear losing profits in case the markets reverse. Therefore, there is a correlation between emotional investing and early exit. A good example of this would be Bitcoin. Since the beginning of the year, Bitcoin has seen a meticulous rise from lows of $1000 to its current price levels of close to $20,000. There are many people who exited way before the current price levels out of fear that the price might reverse. Had they held on to their bitcoins, they would have significant gains at current prices.
Jumping in and out of the market frequently
This is a mistake that is very common in the currency markets. People who make this mistake are usually driven by a false believe that they are smarter than the markets. As a result, they try to profit from every move that the market makes. This not only leads to massive losses since it is impossible to time the market, but even further losses from the heavy commissions and fees that come with overtrading. Smart investors are confident enough in their investment decisions and as a result, trade as minimally as possible.
Trading the headlines
Investors who make this mistake are driven by the false believe that every news out there is tradable. Trading the news is not all bad. For instance, anyone who traded the news of Japan cutting on interest rates a few years ago made a fortune from shorting the Yen. Other than a few opportunities like the case of Japan’s interest rates, most other news out there is nothing but market noise. Trying to trade every news that comes out can be disastrous to your investment portfolio. Smart investors understand the fundamentals of their investments and only trade the news if they are in tandem with their fundamental analysis. Many online media sites consistently post news to try and showcase knowledge. Even communities like Reddit is full of noise and trolls trying to create fake headlines to stir people to trade. Joining a real-time stock trading mastermind like Hashtag Investing allows you to limit getting caught in these headlines.
If you can avoid these mistakes, there is no reason as to why you cannot become a successful investor. There is a common saying in investment circles that, investment is simple, but it’s not easy. It’s simple because it only takes some element of control over your emotional side. On the flip side, it is not easy because controlling emotions is one of the hardest things for most people to do. Control your emotions, find a strategy that works for, stick to it, and you will succeed.