The market has been growing for 12 years in a row, and in the last year and a half at a higher rate than usual. We could also see some volatility during that period. The biggest are the so-called corrections in December 2018 and March 2020. The decline was more than 30%, but from then the market grew significantly. The uncertainty of what will happen to the market next is high.
Anyone who has invested in capital markets knows that many mistakes can be made. These mistakes are often costly. Although we learn best from our own mistakes, it would be best to learn as much as possible from other people’s mistakes and thus reduce the chances of making mistakes on those same things ourselves.
Below I will list top 10 investing mistakes you shouldn’t make which can happen to you when investing:
One of the biggest mistake might be to not invest at all. What I mean by this? I mean generally investing in assets that generate any profit. If you didn’t invest in capital markets in the last 12 years is a huge yield failure.
A lot of people has lost a lot of money in 2008 when there was a financial crisis and the market plummeted. But there is a group of those who have never even tried.
Investing is an important area of every individual as it allows him to beat inflation and preserve his wealth. If you have a greater fear of investing, choose safer assets. However, one of the big mistakes of investing is avoiding this area and not investing at all.
Not Understanding in What Are You Investing
This might be the most common mistake. Whether it is a stock of a company that you don’t know or what it deals with, a fund that you don’t know what it invests in, a cryptocurrency that you don’t know what it’s for, a commodity that you don’t know why you invested in it.
The problem here is impatience and a desire for instant solutions without understanding what we are buying. At a time when all information is at our fingertips, the lack of desire for knowledge is devastating.
We have a good example of this in the present, when everyone has gone crazy for cryptocurrency, even your friends who have never invested before or were interested in it. The likely outcome of this is that only a few cryptocurrencies will survive in the long run, and a good portion will become obsolete and lose. So it was in the late 1990s, people bought everything that had dotcom in their name, not knowing what they were investing in. It will be interesting to see how this chapter ends with cryptocurrencies.
In your ‘career’ as an investor, you will have trips like this. But even if you don’t make money, you always earn a good lesson.
Timing the Market
Most people who encounter investing for the first time are trying to time the market. Some have been in that condition for years. Research has shown that ‘sitting’ on cash is the worst strategy. Looking for the right moment, instead of investing is actually a strategy of missing out.
We had a chance to see it in March 2020. When uncertainty arose, people started selling all their shares. Fear prevails at that moment and it is difficult to buy then. However, it would be the most correct decision to just buy as many shares as possible when they were at a “discount”.
Lack of Diversification
You can diversify on multiple levels. The first diversification you should do is between asset classes. The one most used is the diversification between stocks and bonds. But the increasingly popular assets that are inserted into the portfolio are cryptocurrencies like Bitcoin and Ethereum. You can also diversify part of your portfolio in commodities like gold or silver. Additionally, investment in real estate or REIT and other less popular assets can also be added.
Another level of diversification is in the territory. you can diversify the territory. In that case, you are investing your capital in multiple areas. For example, buy shares of a company in America, part of shares in Asia, and part of shares in Europe.
Furthermore, currency diversification is also important. If one currency depreciates and you have all the investment in it, you will lose a good portion of your wealth.
Here we must pay attention to two main things. The first is the fee we pay to active management if we invest in mutual funds, ETFs, and similar instruments.
The second type of problem is (too) frequent trading where we pay considerable fees for each transaction. These transaction fees can ‘eat’ much of the yield over time. In more recent times, the emergence of online platforms can be traded without or with very low fees.
Letting emotions guide you
You should not let fear or greed control your investment decisions. Stock market returns may fluctate over a shorter time frame, but, over the long term, historical returns for large-cap stocks average 10% (average of SP500 index).
When investing in a long time horizon, a portfolio’s returns should not deviate much from those averages. In fact, patient investors may benefit from the irrational decisions of other investors.
Desire for increased yields
The desire to increase returns quickly can lead us to some high-risk decisions, which could significantly destroy portfolio returns. This means you need to keep your expectations realistic with regard to the timeline for portfolio growth and returns.
Fall in Love With Your Investment Decision
It often happens that after we have decided to invest in a certain investment, we start to firmly believe in that decision and we want it to succeed. Unfortunately, this is not always the case and sometimes this investment, no matter how good it looks when buying, does not achieve the desired results. We need to work on valuation objectives and see if the investment meets our set criteria. If this is not the case we should consider selling that investment.
Waiting to Get Even
Getting even is just another way to ensure you lose any profit you might have accumulated. It means that you are waiting to sell a loser until it gets back to its original cost basis. There are two problems here. The first is that we do not want to admit the current loss, and the second is that we are probably only deepening the loss.
Investing Money You Will Soon Need
In order not to just talk about how to invest, this point distracts us from investing, and asks if we really have the money to invest? If we plan to put the money we soon need on the market, there is a high chance that we will lose some of that money. Reason for this is the volatility of the market in short term. Therefore, we cannot really know if the price will go up or down.
In addition to the top 10 investing mistakes you shouldn’t make above, there are many other mistakes that investors face. For example, leading for the masses, get-rich-quick schemes and so on.
But perhaps most important is not having a defined investment strategy, not creating a portfolio according to your long-term goals and risk appetite.
As with other things in life, investing isn’t really complicated at all if you know what you’re doing. However, to learn, we have to make mistakes and learn from these mistakes. It is part of the process.