Investors make a ton of mistakes when it comes to investing in the stock market. I don’t blame them since there is so much conflicting information out there. I found this great article from The Wall Street Journal that addresses the 3 most common investing mistakes the ordinary investor makes. In summary:
- Blowing in the wind: Some investors are just too easily swayed. And sometimes that leads them to sell low and buy high.
- Focusing too narrowly: Advisers preach diversification as a way to weather the ups and downs of financial markets. But some investors still cram everything they’ve got into a single type of asset.
- Not focusing at all: Diversification is good, but a scatter shot approach to investing is likely to miss the mark.
I want to address each of this individually and show you how to not fall victim to these common investing mistakes.
Common Investing Mistakes
#1: Blowing in the Wind
The first common investing mistake is that too many people are swayed by the “doom and gloom” or the “irrational exuberance” they see in the media. Much of the hype leads to bubbles, just like we saw in the housing market. Investing success comes from being lazy; lazy in terms of not reacting to the hype from the media and staying the course.
It reminds me of my high school soccer days. My coach asked me if I wanted to score goals. I said “of course I do”. He then asked if I could be lazy and not run around a lot. I agreed, though it made no sense to me. It turns out, he wanted me to shadow the opposing teams sweeper. (For non-soccer fans, this is the defender that is the last person between the offense and the goalie.) As long as I don’t get greedy and shadow the sweeper, whenever the ball goes past the sweeper, it’s a foot race between him and me. And if I win, it’s me versus the goalie. The hardest part of it all was to sit back and watch everyone else run around. I wanted to be part of the action. But I followed my coach’s advice and I scored a handful of goals that year.
The same idea holds true with investing and staying invested. It’s easy to get caught up in the hustle and bustle of the market. You see a stock that returned 50% last year and you want in. You hear of your neighbor down the street who made a killing on a penny stock. You want in on the action.
The truth is however, that being lazy and taking a passive approach to investing will almost ensure you become a stock market millionaire. It goes against everything we are taught about life: If you want something, you have to take action. With investing, it’s the opposite.
Furthermore, you cannot time the market and missing just a few days can have dramatic impacts on your returns. So your best bet is simply take a buy and hold approach and to stay invested over the long term.
#2: Focusing Too Narrowly
Common investing mistake #2 is along the lines of the first point. Many times people will be chasing returns and simply invest in one asset class (tech stocks in 2000, housing up until 2007, or gold more recently) to make their money.
But nothing rises in price forever and you will not know when the top has occurred. You can only tell in hindsight and that doesn’t help you out now. Spread your money by diversifying and take advantage of the reduced risk it offers.
History has shown that a simply portfolio made up of stocks and bonds is the best route for the majority of investors to go. Don’t fall victim to today’s hot stock or sector. Spread your money around so that you can reduce risk and still earn the return you need.
#3: Not Focusing At All
Of course, the opposite of the above is having multiple investments with multiple advisers that gets to the point where you don’t know what you own, and a trusted advisor needing a week to figure out the discombobulated mess that is your portfolio. You don’t need to own 20 international funds, 10 bond funds, and 10 domestic equity funds. Keep it simple. Diversify but don’t go overboard.
Diversifying only works to a certain point. Chances are, those 20 international funds own most of the same companies. So while on paper you think you are very well diversified, in reality, you aren’t.
Furthermore, most investors can be fully diversified with only 3 mutual funds (Heck, some even use just one fund). Sounds crazy, but it’s the truth. I outline this strategy here as well as a few other model portfolios to look into.
Automate To Overcome These Common Investing Mistakes
One easy solution to overcome these common investing mistakes is to automate your investing. I use Betterment to invest and have turned many of my friends onto Betterment as well. They take all of the guesswork and emotion out of investing. In 10 minutes you have an account and portfolio set up. Just set up an automatic investment and Betterment takes care of the rest.
I’ve found that automating areas of my finances leads to the greatest success, so why not include investing as well? I encourage you to check out what Betterment has to offer. You won’t be disappointed.
There are many investing mistakes that investors make. Highlighted here were the three more common investing mistakes. If you make them, don’t beat yourself up over it. Correct the issue and move forward. Be happy that you realized your error and are now on track to investment success.
After all, we all make dumb investing mistakes, including me. The key is to learn from the mistake and keep growing, keep investing.
Readers, what are some common investing mistakes you make or have made?