What are the mistakes stock investors make? How can you avoid making the same ones?
No matter how good your instincts are when it comes to playing the markets, investment pitfalls can happen to anyone at any time. Part of why these traps are so common is because people either don’t realise they’re falling prey to them or because they think they can outsmart the system. Learn more about the common mistakes investors make, and why success has more to do with your patience and wherewithal than how smart you are.
1. You Tried to Time the Market
Everyone is trying to buy stocks at their lowest possible prices and sell them when they reach their peak, but this obsession to time the market can ultimately get you in a lot of trouble. If the market continues its general upward trend, as it has for the past few decades, then the odds of selling at the right time are stacked against you. Plus, stocks tend to make the most in tight timeframes. In other words, if you miss out on a very few key months or even hours, you’ll miss out on maximising your profits. Overall, it’s better to be steady than to try to beat the clock.
2. You Let Your Emotions Get in the Way
There’s nothing wrong with feeling something when you’re trading. In fact, many people are drawn to the market because it gives them a chance to express excess energy and satisfy their need for excitement. But you’re ultimately mixing your own volatility with the market’s volatility, a recipe that can cause your portfolio to implode. Investors ultimately can’t be speculators, nor can they jump on the get-rich-quick bandwagon. Real investors do their homework on the investments they make, and they squash their ‘fear of missing out’.
3. You Confused the Events
Recovery bias is the idea of treating recent events as though you can predict the future. So if you notice that a stock is on its way up, you may conclude that the trend will continue to happen in the future. It leads to too many investors buying too much stock at the very height of its price. Investors who start to see a stock outperforming its counterparts should instead ask what’s driving the price rise. If it’s all smoke and mirrors or vague promises, they’re better off ignoring the spike altogether.
4. You Expected Success Every Single Time
An investor who’s done all of their homework and believes they’ve developed a near-foolproof strategy is still going to fall flat on their face once in a while. This is because there is no perfect approach to investing. (Or at least, certainly not a documented case of it.) Even when you look at the powerhouses (e.g., Buffet, Templeton, etc.) you’ll see that they’ve suffered their fair share of losses too. Taking a more realistic approach to investing can help you put your losses in perspective and learn from them so you avoid the same mistakes in the future.
5. You Chased After Dividend Yield
With interest rates being what they are, companies are trying to attract investors with higher yields. And unfortunately, it’s working. We see the numbers and are immediately caught up the promise of high income. But the fact is that if the company hits any kind of financial trouble, they’re going to ignore your dividends to pay their own bills. So investors are losing out on both the value of the shares and their dividend income.
6. You’re Stuck with What You Knew
On the face of it, this strategy may seem like a smart one because you’re only investing in things that you truly understand. You buy your own company’s stock, you only invest in the industry in which you work, or you stick with the Australian stock market. And while there are solid advantages to this strategy, you also don’t give yourself a chance to branch out and learn new markets and opportunities. Plus, it will crush your portfolio if there’s a sustained downward trend.
7. You Bought Too Early
The beginning of any trading day is chaotic because it’s nearly entirely driven by fear that stocks have reached their sell-by date or avarice that investors are going to be billionaires by the end of the day. This kind of chaos is something that experienced investors avoid because it usually isn’t worth it to make moves during this time. Instead, wait until a little later in the morning or afternoon so the market can iron itself out.
8. You Missed the Real Value
Sales and deals are everywhere in the consumer world, making it easier to spot when and how you should buy. But stocks and bonds don’t advertise themselves to be 50% off on Black Friday, which can make it harder for investors to evaluate them. Investors who first work out their margins and growth have a better chance of buying stocks that fit their budget.
The Australian Bond Exchange is dedicated to helping investors insulate themselves from uncommon and common mistakes alike. We know that a solid investment foundation is the key to keeping you and your family protected from the unexpected.
If you want to learn more about the advantages of trading with us, give us a call today.