7 Common Investing Mistakes to Avoid
December 28, 2021
It is not a secret that the pandemic has brought a new wave of investors into the market. I can still remember the excitement of putting my first dollar into investing and I am sure that most of you are eager to give the stock market a shot.
While I would love to tell you that it will be a smooth sailing ride from here onwards, the reality is that investing in the stock market is more of a roller-coaster ride. To help those of you who have just started investing or even the more experienced investors, I have listed down seven common investing mistakes that you can avoid:
1) Chasing after the market trend
It was not too long ago when we saw the Meme stock frenzy. In fact, I have friends who are so excited about these latest trends that they are constantly betting their money on future trends, such as the latest cryptocurrency craze, the next Meme stock or even the next luxury goods that would surge in price. Well, I hate to break the news to you but if you are only chasing after the next market trend, what you are really doing is gambling. You can read about this in Tim’s article on Investing vs. Gambling: What’s the Difference? here.
A lot of investors make the mistake of constantly chasing after the market trend because of the fear-of-missing-out or FOMO. If you get it right in terms of the market trend, congratulations to you but I will recommend that you do your own research before putting your money in the market. The latest hot trend might give you the joy ride but ask any fund managers who have been through the dot-com bubble and they will tell you that investing is more than just riding the bull run. The solution to this is simple. Never invest in something that you do not understand and if you have a busy work schedule, another option would be to consider a passive investing strategy instead. If you are still FOMOing, set aside a certain amount of “fun investment money” to play the market trends but it should be money that you can afford to lose and it should be no more than 5% of your investment portfolio.
2) Following advice from social media blindly
When I first started investing more than 10 years ago, there wasn’t a lot of financial education materials readily available and I had to do a lot of my own research to understand about investments. Today, we have a lot of information on the internet but I cringe at some of the information that is available for investors. We have an overload of information and to make things worse, there is so much misinformation out there especially on social media.
Thanks to social media, we see a lot of “Stock Market Gurus” showing off their latest Porsche car, or a video of their fancy vacation, and it portrays investing as something that could be done without much work. If you buy into that story, you are in for a disappointment. While investing is no rocket science, it requires in-depth research, in order to make informed investment decisions.
In general, do not take any stock tips blindly because you need to weigh the options provided to you against what you may already have. For example, you may be better off putting that money into your employer-sponsored retirement account or you might already have too much holdings on high growth companies in your investment portfolio.
It is good to exchange ideas on social media but always do your own research.
3) Averaging down on a loser
Sometimes it is okay to make mistakes when investing but it is always a bad idea to double your money on losers. At times, I know it is a dilemma especially since the stock price is determined by various factors and at times, even good companies would see a decline in their share prices. Personally, I do not focus too much on the share price but on the fundamentals of the company. This includes their financial performance, balance sheet and even if there is a change in the management team.
So, if you realise that there is a structural change in the business of the company that you have invested in, and it is not going to recover anytime soon, adding money into that uncertainty might just be throwing good money after bad.
It is important to grow your wealth when it comes to investing but it is even more important to preserve your wealth. Warren Buffett used to say this, “Rule no 1: Never lose money. Rule no. 2: Never forget rule No.1.”
4) Sell your investment too quickly
I remembered a story that my grandmother used to tell me about her brother. He was a good stock picker but had never been able to reap the rewards as he always sold his stocks too early.
This is one of the worst mistakes that investors could make: bail out on their investment too quickly because the share prices did not surge within weeks after the purchase.
Time is important when it comes to investing. Personally, I will only invest in companies that I believe I could hold for more than five years. If you are not as patient as I am, at least give it a year before you decide on your next move. Always remember to give your investment time to grow.
5) Borrow money to invest
There are people who would borrow money to invest because they have heard about the multi-fold returns that comes with leverage. If you are thinking of borrowing money to invest, don’t.
The stock market is volatile and even if you have invested in a good company, it would take a while before the share price could go up. There is also the possibility that the market did not recognize the value of the company, resulting in share price decline and amplified losses for you.
Imagine if you are borrowing money at a 4.0% interest rate, you would need to ensure that your portfolio’s return exceeds 4.0% every year to achieve profits. So, if you are eager to have exposure in the stock market but have little capital to start with, consider other alternatives such as the Exchanged-Traded Funds (ETFs) or Index Funds that are available.
6) Falling in love with a company
Sometimes, it is easy to fall in love with a company especially if the company that we invested in is doing well. This is one of the mistakes that I made early on and while it was a painful experience, I am glad it is something that I learned when I was younger.
At the end of the day, if the fundamentals of the company and its businesses change, consider selling the stock. Remember, you invest in the company because you believe in its sustainable growth. If this has changed, it is time to move on. You are not married to the company that you are invested in. Consider putting your loyalty into your marriage instead.
7) Failing to diversify
Here is an exercise that I would encourage investors to do, especially if you have been investing in the stock market for a while. Ask yourself if you know the exposure that you have in different major sectors. If you cannot answer this, it is likely that you have invested too much in certain sectors.
Unlike professional investors who have different analysts to look into various sectors, individual investors like you and I, have to monitor the entire portfolio on our own. There is a limitation to our ability to understand the business nature of different sectors and I noticed that we tend to favour companies that we understand better. For example, if you are familiar with semiconductor stocks, there is a high chance that your portfolio consists mostly of these companies. Similarly, your friends who are involved in the property market might be more inclined to buy into property companies or REITs.
The downside risk to this is you would be exposed to a systemic risk or an event that can trigger a severe instability of an entire industry.
I remembered back in 2014 when the brent crude oil collapsed from above USD100 level to below USD50 level, one of the portfolios of a fund that focuses on energy stocks saw a severe collapse in value. If professionals who do not diversify their holdings could suffer deep losses, it could happen to us as well.
So, if you have already invested in the market, make a conscious effort to ensure your portfolio is diversified. As a general rule of thumb, try to limit exposure to 10%.
Mistakes are part of investing and these lessons are what makes us better investors. Having said that, I hope that by sharing with you some of these common mistakes, it will help you to succeed as an investor without going through all these painful lessons.
To avoid making these mistakes, it is vital for you to develop a principled investment strategy. I have written a guide on this in Investing Checklist: 10 Questions to Ask before You Buy a Stock (Part 1) and Part 2. Hopefully, it is something that works for you.
Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.