6 Dumb Investing Mistakes to Avoid

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The following is a post by Miss T who blogs at Prairie EcoThrifter. She grew up in the Canadian prairies and still lives there today. She is passionate about saving money, being healthy, looking out for our environment, and most of all having fun. Her blog shares tips on how you too can live a green, debt free, and fun life.

Smart people sometimes make dumb mistakes when it comes to investing. Trust me, I’ve done it. Part of the reason for this, I guess, is that most people don’t have the time to learn what they need to know to make good decisions. When I first started investing I didn’t know much at all. I often relied on the advice from others. Another reason is that oftentimes when you make a dumb mistake, somebody else—an investment salesperson, for example—makes money which makes the whole situation a contradiction.

In my many years of trying to figure out the ropes of personal finance, I have learned what does and doesn’t work when it comes to investing. Here are 6 mistakes to avoid. Trust me, you don’t want to take the same road I did.

Always Diversify

Everybody who thinks about this for more than a few minutes realizes that it is true, but it’s amazing how many people don’t diversify. For example, some people hold huge chunks of their employer’s stock but little else. Or they own a handful of stocks in the same industry.

To make money on the stock market, you need around 15 to 20 stocks in a variety of industries. This is why index funds have become so popular. When you own fewer than 10 to 20 stocks, your portfolio’s returns will very likely be something greater or less than the stock market average. Plus you won’t keep up with the costs of inflation.

Have Patience

This is something I am not good at in any aspect of my life. The stock market and other securities markets bounce around on a daily, weekly, and even yearly basis, but the general trend over extended periods of time has always been up. It’s important for investors to have patience. There will be many bad years, bad days, and bad months. Many times, one bad year is followed by another bad year. What you need to remember though is that over time, the good years outnumber the bad. Plus they compensate for the bad years too. Patient investors who stay in the market in both the good and bad years almost always do better than people who try to follow every fad.

Apart from me, my parents always struggled with this. In fact they sometimes still do. They don’t like seeing the dips daily,monthly, or yearly. It stresses them out too much. They often pull their investment and switch it to something else. All this does is put them further away from their goal. I wish I could talk some sense into them.

Use Dollar Average Investing

You may already know about dollar-average investing. Instead of purchasing a set number of shares at regular intervals, you purchase a regular dollar amount, such as $100. If the share price is $10, you purchase ten shares, etc.

Dollar-average investing has two advantages. The biggest is that you regularly invest—in both good markets and bad markets. The other advantage is that you buy more shares when the price is low and fewer shares when the price is high. As a result, you don’t get carried away and end up buying more stock than you can afford.

Don’t Forget About Investment Expenses

Investment expenses can add up quickly. Small differences in expense ratios and income taxes can easily subtract hundreds of thousands of dollars from your net worth over a lifetime of investing. Investment expenses can add up to really big numbers when you realize that you could have invested the money and earned interest and dividends for years.

Avoid Being Greedy

I like all of you wish there was some risk-free way to earn 15 or 20 percent annually. But you know as well as I do there isn’t. The stock market’s average return is somewhere between 9 and 10 percent, depending on how many decades you go back. You just need to take your time.

I mention this for a good reason: People make all sorts of foolish investment decisions when they get greedy and pursue returns that are out of line with the average annual returns of the stock market. If someone tells you that they have a sure-thing investment or investment strategy that pays, say, 15 percent, don’t believe it. If someone really did have a sure-thing method of producing annual returns of, say, 18 percent, that person would soon be the richest person in the world. The point is: There is no such thing as a sure thing in investing.

Don’t Pretend to Know it All

As a practical matter, it’s very difficult for people who haven’t been trained in financial analysis to analyze complex investments such as real estate partnership units, derivatives, and cash-value life insurance. Financial analysis is nowhere near as complex as rocket science but it’s not something you can do without a degree in accounting or finance, a computer, and a spreadsheet program. I would recommend hiring an hourly fee investment advisor to get your started. They can get you on track with a plan that will work for you.

So, as you can see, investing can get quite complex and you really need to have some knowledge behind you to do it successfully. I hope that by sharing my mistakes I have prevented you from making them yourself.

So readers, have you made any investment mistakes? What did you learn?

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Investing Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

27 Comments

  1. Very good advice. Even following the Great Depression, those who dollar cost averaged were back to even within five years despite taking 25 years for the Dow to return to 1929 levels. It is very important to keep investing through thick and thin.
    cashflowmantra recently posted..Worth More Dead Than Alive

      • That’s one of the biggest thing Warren Buffett (along with many others) recommends: Don’t be emotional with the stock market, ’cause you’ll never win.

  2. What a great post Miss T. As they saying goes, you shouldn’t confuse a bull market for brains. Easy returns or hitting a home run or two can lead to complacency and ignoring the fundamentals of investing. As you said, analyzing complex investments requires a bit of knowledge, which is useful to have before diving into the swamp.
    101 Centavos recently posted..Oil Leaks and Experts

  3. Awesome advice Miss T. In this economic environment you’re strategies are a real wake up call for investors to be conservative and realistic
    Zero Passive Income recently posted..June 2011 Wealth Reports

    • I think being conservative and realistic is a problem for a lot of people in today’s society in general. It seems that people like to operate in the extremes all the time. A balanced approach is best, even with your investments.
      Miss T @ Prairie Eco-Thrifter recently posted..Blogging for Passive Income

  4. This is something I want to learn everyday. I want to change and be passionate about saving. I need to control myself from spending!
    Cadmancadmus recently posted..First Date Lyrics

  5. Most people don’t realize the power of regular investing, since when the market is down your buying power goes up – assuming of course you don’t need the money right now. Probably one of the biggest mistakes people can make is to stop and then lose out on this advantage. But its a hard lesson to understand if you don’t know much about investing.
    KDB recently posted..The One Thing You Absolutely Positively Must Do To Get Yourself Out Of Debt

  6. the investment expense tip is definitely one that i learnt the expensive way! used to buy mutual funds thinking it was a bright move letting the experts handle my money… NO! the annual fees they slap on the portfolio just doesnt add up esp when the funds are not doing particularly well in this roller coaster economy…
    B Kelly recently posted..What’s Your Version of Debt-Free?

    • This is quite true! If you are earning quite a large return though, the fees might be worth it. Pay careful attention to this though. It can be a really expensive lesson to learn!

    • For sure! Index funds are a great way to invest. You don’t have to be super knowledgeable, and they can really boost your portfolio!

  7. Having the right knowledge and doing the right thing can really help you along the way. Having investment is important and knowing what kind of investment is right for you and when to invest is surely some of the things you should know pertaining to this matter.
    hunts recently posted..– DATING TIPS FOR MEN

    • Having a solid knowledge of your investments is certainly key when it comes to doing well. Picking at random is really gambling, not investing.

  8. Its particularly shocking, to me, to see people who hold huge sums of their employer’s stock. This is the most risky type of stock to own, because if the company fails, you lose BOTH your job AND your portfolio (and possibly your pension as well). Its the very definition of having all your eggs in one basket.
    Paula @ AffordAnything.org recently posted..Brief Guide to World Travel

    • Very good point Paula! Talk about having all your eggs in one basket! Diversification is so important – everyone needs to spread their money around for safety.

  9. These are great bits of advice, although since you already have several “I agree” comments I’ll put in a little counter-advice. These are good generic tidbits to retail investors, but they have little application if you are more sophisticated.

    Examples: The employer stock holdings may be very low risk for you since you know much more about that business than some miscellaneous stock. Also, as a business owner you are essentially fully invested in the business that is your income — but that’s your best shot to make it rich.

    Dollar-cost averaging is good only if you don’t have any way of analyzing. However, if you could invest all your money when the market is down and sell when the market peaks then you will gain much more. Of course for the general market and for most of us, this is impossible, but for many investments it’s not (eg: you may find a distressed real estate property that is far under-valued and you know what it would take to bring it up).

    Patience is a good virtue most of the time, but sophisticated investors make their money at the time of purchase, not by waiting. It is mainly the uninformed (I’m saying stupid, just asymmetrical information) and without resources who have to wait and hope to make a return.

    Anyway, I’m not negatively commenting. Those are perfect rules, but when you find a way around them then the larger returns open up.
    Alex | Perfecting Dad recently posted..Don’t Pay Your Child For Chores

  10. I wish i knew how to save..I love saving but when I need things to buy, I just can’t help but spend the money I have been hiding….lol..
    sometimes, I even invest on small business only to find out, I have spent more than I could profit..
    michelle recently posted..Dating Tips

  11. Funny thing is I made all 6 dumb mistakes. I guess I learned the hard way and lost a bundle. Its better than not learning at all!
    frank recently posted..Divorce Attorney Long Island

    • At least you learned from your mistakes! Now it’s time to learn and get rich! I bet you can do it!


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