Sometimes all statistics point one way, but your gut (feeling) says go the other way. The result is that you either heave a sigh of relief, or end up kicking yourself.
Even the most successful investors make mistakes along the way, some more costly than others. Following common sense will help you avoid the gravest of errors, but accept that making mistakes is part of the investing process — you can’t win all the time.
It’s impossible to foresee all the pitfalls along the way but there are some mistakes to which investors fall prey time and again. Being aware of these common mistakes will help you to avoid them, and save you considerable anguish and, possibly, money.
Think of them as the ‘seven deadly sins of investing,’ and make every effort to steer clear of them.
- Fear: The fear of losing can paralyse investors and prevent them from acting when they should. Fear in small doses can be a positive emotion when it acts as the restraint that holds you back from making a foolish investment. As with all things, it’s only good in moderation.
- Greed: The desire to get rich quick, to find the ultimate investment and beat all the odds, can be just as dangerous to an investor. Unable to resist the temptation of making millions from pennies, the greedy investor allows himself to get swept away into bad investments at the worst possible times. A healthy appetite for money needs to be tempered by sound judgement.
- Ignorance: Overestimating your knowledge of investing and financial markets can lead to serious losses. Knowing a little bit doesn’t mean you understand the big picture. If even financial experts make mistakes occasionally, think how much more so the amateur investor is liable to go wrong with the little knowledge he has. It’s much wiser to accept your limitations and seek professional advice instead. Just because you know how to paddle, doesn’t mean you should jump into the deep end – chances are, you’ll go under.
- Over-confidence: You have a few successful investments and you think you’re onto a winning streak. Thinking you’re a financial whiz, combined with the excitement that comes when you’re making money, can make you insensitive to market realities and lead you to make unbalanced investment choices. Even if you’re on a roll, try to slow down and assess each investment opportunity calmly and reasonably.
- Stubbornness: Inflexible thought can be an investor’s worst enemy. Investing is a dynamic, constantly changing process and it’s critical that investors be attuned to these changes. An investor who stubbornly holds on to old beliefs about a particular stock or investment approach, or who fails to respond to changes in the market, is at risk. The stubborn investor is unable to acknowledge mistakes and reach practical conclusions.
- Herd mentality: When everyone is buying property, it doesn’t mean you should. Just because a particular investment seems to be ‘the in thing,’ doesn’t mean it’s necessarily suited to your needs. Don’t make investment decisions based on what other people — supposedly those in the know — are doing. Trust your own judgement, and seek professional advice.
- Day trading: It may seem like the end of all your problems and the road to riches, but beware – it can be the road to ruin. Day trading is a very dangerous game and should only be attempted by the most seasoned investors who have undergone formal training in day trading. Also, many investors are unaware that it takes a lot of money to succeed in this game. You need sophisticated software in order to maintain an efficient day trading strategy.
There is nothing wrong with making mistakes when you are young, but as you get older and closer to retirement this can be catastrophic.