Avoiding Costly Investing Mistakes: Choose a Strategy with Better Returns to find wealth-building opportunities for improved portfolio performance. This lesson is a valuable opportunity to learn from the mistakes of others and avoid common and costly investing mistakes that hinder portfolio and wealth growth. Explore six major pitfalls—investing based on news without research, holding losing stocks, and averaging down on underperforming investments—and you'll gain valuable insights into more thoughtful investment strategies. Understanding and avoiding these common errors will help you make informed decisions, improve investment outcomes, and build a more prosperous, long-term portfolio.
What You Learn From: Avoiding Costly Investing Mistakes: Choose a Strategy with Better Returns
This lesson covers common avoidable errors that harm investors. Investing on news without doing homework or doing no research but holding losing positions or averaging down or betting on turnarounds or investing but not paying attention are all big, costly investing mistakes. Avoiding these investing sins can significantly improve portfolio returns and help build wealth.
FAQs Investors Ask About Avoiding Costly Investing Mistakes: Choose a Strategy with Better Returns
These questions and answers about avoiding six investing sins have overlapping answers which help investors understand how stock markets, investing, and money-making interrelates.
What strategies should a new investor avoid?
New investors can save costs and avoid problems by learning about markets and investing before they invest. Knowledge is the key to unlocking No-Worry Investor stock market investment success.
Successful investors continue learning, controlling costs, and researching. Their research is the foundation of a repeatable investment process only to buy what they know and understand.
That includes understanding that a financial and investment plan is essential to wealth-building. Plan considerations include the time value of investments, inflation, compounding, and learning to select the best wealth-building assets.
Why do investors fail?
Most failing investors have a record of emotional or unfounded belief-based decisions made in a fog of market noise. But when a pattern of failure begins, a self-check can make them aware change is needed to save their financial future.
Investors who skip their homework or ignore risks set themselves up for failure. Most mistakes fall into one of three stock market failure traps:
1. Following the herd or media opinions without doing their research,
2. Trying to time the market - something savvy investors never do,
3. Investing without market or investment knowledge.
To eliminate these failure traps, wise investors learn before trying to earn and do their homework to understand an investment before putting any money on the table.
What are the most common investment mistakes?
Successful investors avoid these six common investment mistakes,
1 Only using news, social media, or rumors as investment research.
2 Investing before understanding or researching an investment.
3 Falling in love with a stock or refusing to sell losing stocks.
4 Investing in risky stocks like turnaround speculations.
5. Averaging down to buy more of an underperforming investment.
6. Not monitoring markets and holdings to maintain investment awareness.
Wealth-building investors avoid these pitfalls using goal-oriented investment planning and good investment management. That includes never trying to time the market, keeping costs, including fees, low, and using smart diversification for good returns and minimum concerns.
How do I avoid investment mistakes?
No-worry investing principles help investors avoid the frustration and challenge that mistakes can bring to investing. After all, avoiding mistakes lets investors keep the money building their wealth.
To avoid the most common investing mistakes, follow these principles,
Trust research.
Never buy IPOs.
No short-term trades.
Invest rather than trade.
Use smart diversification.
Maintain a long-term view.
Don't sell at the bottom or average down.
Continually add savings and reinvest returns.
Buy and hold reliable, growing, productive assets that pay.
Carefully minimize costs to keep the money working for them.
Know and manage their emotional tendencies and behavioral biases.
What investing mistakes are most common?
The most significant investor mistake is poor research that produces inadequate decision-making knowledge.
Six other significant errors include:
Fee blindness
Emotional trading
Short-term trades
Poor diversification
Risk tolerance errors
Investing without goals
Finally, the error list rounds out with seven more money-burning mistakes, including:
Averaging down,
Buying turnarounds,
Selling at the bottom,
Performance chasing,
Holding losing investments,
FOMO (fear of missing out),
Only using media reports for research
No-Worry Investors learn before they earn, plan, and manage emotions to avoid making poor investment decisions. They use knowledge to avoid diversification issues, control costs, manage risks, and never buy on margin or carry debt.
What mistakes should investors avoid?
Knowledge is critical to investment success, so investing without knowing is the biggest mistake an investor can make.
Avoid that and other investment mistakes with these steps:
1. Invest to know investments, investing, and markets.
2. Manage thoughts and emotions and act with an investor's mind.
3. Develop an investment plan around your circumstances.
4. Be a long-term patient investor.
5. Reinvest to compound returns.
6. Never time the market.
7. Control and minimize costs, and sell investment losers.
8. Build your portfolio using smart diversification.
Use the Investor Mind article from White Top Investor as a guide to developing your investor mind. Then learn to research, find, and buy quality, income-producing assets as long-term holds.
Avoiding 14 Costly Investment Mistakes
Wealth-building investors have the most success by avoiding mistakes. While numerous investor mistakes are possible, some are more dangerous to wealth than others. Among these, the most significant is poor research, often resulting in inadequate decision-making knowledge. This guide discusses the common errors that investors should avoid.
Poor Research Leading to Inadequate Decision-Making Knowledge
Research is the backbone of informed investing and is used to learn the essential information to make sound decisions. Whether understanding a company's fundamentals, analyzing market trends, or assessing economic indicators, diligent research is critical to successful investing.
Fee Blindness
Investors need to pay attention to the impact fees have on their net returns. Fee-blind investors underestimate the impact of fees on their returns. Whether it's management fees, transaction costs, or other expenses, being blind to fees can erode gains and hinder long-term wealth-building.
Emotional Trading
Emotions such as fear and greed cloud judgment and lead to impulsive investment decisions. These decisions result in buying high and selling low, the opposite of what successful investors aim to do. Managing emotions is an essential part of a disciplined investment strategy.
Short-Term Trades
Frequent trading racks up transaction costs and taxes and diminishes returns. Market timing can whipsaw short-term trades as investors struggle to do the impossible and predict market timing.
Poor Diversification
Failing to diversify risks exposes holdings to individual asset or sector volatility. Proper diversification across various asset classes can help mitigate risk and improve portfolio resilience.
Risk Tolerance Errors
Understanding risk tolerance is crucial for constructing a portfolio that aligns with your financial goals and comfort level. That avoids underestimating or overestimating risk tolerance and inappropriate asset allocation decisions.
Investing Without Goals
Investing without clear goals is like traveling without a destination. Specific objectives give investors direction and avoid struggling with asset allocation, risk management, and time horizon decisions.
Averaging Down
Doubling down on losing investments to recoup losses is a costly money-burn for too many investors. Instead of chasing losses, investors should focus on sound investment principles and, when necessary, cut losses to buy more winners.
Buying Turnarounds
Investing in companies undergoing a turnaround is risky as many fail, leading to substantial losses or severe dilution for most small investors, despite some successes.
Selling at the Bottom
Panic-selling during market downturns locks in losses and prevents investors from participating in eventual market recoveries. Just stick to your well-researched long-term investment plan and strategy to avoid knee-jerk reactions to market volatility.
Performance Chasing
Investors who chase past performance may buy high and sell low, as assets may already have peaked in value. Instead of chasing trends, stick with your long-term plan focused on fundamentals and asset allocation.
Holding Losing Investments
Holding onto underperforming investments can tie up capital and hinder portfolio growth. Instead, regularly reassess each investment and cut ties with those that no longer perform or align with your investment plan.
FOMO (Fear of Missing Out)
FOMO investing is impulsive, speculative, high-risk behavior with a record or poor performance. In contrast, disciplined investors stick with their well-thought-out investment plan, avoid short-term market fluctuations, and continue their solid wealth-building record.
Limiting Research to Media Reports
Relying solely on media reports for investment research can lead to incomplete or biased information. While media sources can provide valuable insights, investors must conduct thorough research before making investment decisions.
No-Worry Investors Learn Before Earning Avoiding Costly Investing Mistakes: Choose a Strategy with Better Returns
No-Worry Investors prioritize education, planning, and emotional management. By acquiring knowledge, setting clear goals, and adhering to disciplined investment strategies, they can confidently navigate the complexities of the market and avoid costly mistakes.
Successful investing requires diligence, discipline, and a willingness to learn from mistakes. Avoiding common pitfalls such as poor research, emotional trading, and chasing trends can increase investors' chances of long-term financial success.
Avoiding Costly Investing Mistakes: Choose a Strategy with Better Returns The Six Common investment mistakes to avoid
Dramatically improve investing returns by avoiding this sin list:
News only investing = bad news!
No research = no results!
Holding losers = poor profits
Bankrupt buying = sinks money
Averaging down = sinking returns
Distracted investing = cash crush
The wide-ranging list includes: making investments based only on a media report, investing without research, holding investments that are losers, investing in turnaround or bankrupt companies, averaging down by buying more of a loser, not learning about or paying attention to investments.
These Six Sins of new investors are mistakes that have the nasty habit of being costly. We must learn about them, avoid them, and quickly correct these mistakes should we make them. If you fall into any of these investing traps, get out as soon as you realize you have committed an investing sin! Rescue your money and get it into a profitable position.
Six Sins of new investors are common errors made by far too many inexperienced investors. However, they have lots of company. Some very experienced investors and far too many financial advisors, who should certainly know better, commit these expensive financial sins!
Avoiding costly investing mistakes No. One. News only investing = bad news!
Event or news-only investing = bad news! The first of the 6 sins of new investors: investing based only on a news story. Investing in a company only because of media attention usually produces poor financial returns.
News cycles are short, and the stories change daily. Yesterday's story was replaced by a new one. News is new. Even a big event story typically fades in under a week.
Events happen, get reported and pass into history. Most often that happens without having any lasting effect on the value of a specific company.
A business or industry may get positive or negative media coverage, but that usually has little long-term effect on shareholder value. Don't invest with just a news report. Find underlying value before investing.
Investing, trading & speculating are different
Learn the differences between investing, trading, and speculating. Here we are talking about investing.
If you are investing, take a long view. Check into the background of the company that caught your eye or ear. But also look forward and around. Consider prospects and possibilities for the company and consider the context. Consider how it fits, affects, and gets affected by the industry and the economy.
When serving as a CEO, I learned how to get publicity and always welcomed media attention. New investors were often attracted. Publicity was also very good for attracting customers. By attracting media attention and being in the news, more people become aware of the company. Awareness helps make doing business easier.
Generally getting publicity works well for the company involved. My warning here is not to either buy or avoid companies in the news. Rather, it is never to make that the only reason why you buy or sell. Do the homework.
There is money to be made by playing news cycles. But as a trader, or a speculator, not as an investor. In other blog posts, we discuss the differences between investing, trading, and speculating. We can then go over the details of why each requires using different strategies and tactics for success.
Avoiding costly investing mistakes No. Two, No research = no results!
Investing without doing your homework or research = blind investing. This second of the 6 sins of new investors: investing without research. If we miss doing our investing homework assignment, we pay by losing money or opportunity.
We must do the research on each investment. Do the research before investing. Yes, I know, I harp on this point. It is so very important. Doing homework is at the very core of investing success. So I say again, do your homework, and you can become a superior investor.
Doing your homework can help you get richer
Failing to do the research is a very costly mistake. You can get lucky, but you can't always fake this test. It can put lots of money into your pocket! You can't possibly find work that pays a higher hourly rate than what you can make for the time spent doing investing homework. Decide to get richer, do your homework!
Avoiding Costly Investing Mistakes No. Three, Holding losers = poor profits
Loser holding kill money. The third of the 6 sins of new investors: holding companies that are losers plays the wrong group. Investors ride winners, not losers and need both a long view and patience. But that does not mean you must hold forever.
Sell, when and as soon as you know, that you have a loser. Do not carry a losing stock. Get your money out and bring it back to life by selling losers.
If a stock or the market declines in price, our homework pays off by helping us make good decisions. Being informed about the market and economy, as well as knowing the companies in our portfolio, allows us to make informed decisions to buy, stay or sell.
Doing homework also prepares for price changes. When prices move down we then find ourselves in a good place. We can see if the market is having a short-term emotion driven fit, a dip, a correction or if something more significant has happened or changed. We can be among the earliest to see and correctly react to a downturn.
The market regularly reacts with emotion driven fits. Don't let the noise, trading action and drama frighten you off.
However, we do need to act when things change. Sell when the facts change to negative. When facts change to create a new negative reality, we must accept that new reality. And immediately sell! We discuss this in greater detail in other posts.
Pointing at the losing investor who makes common investment mistakes that are avoidable errors. Superior investors learn the basics before investing.
When normal leaves you should too
When the facts go negative, they are not going to get back to “normal”. The changing facts means that the negative picture is the new normal. The old normal is gone and like yesterday, will not come back. Sell, and give the recovered money new life by being ready to invest in your next winner.
Think of our job as investors as a simple one. We invest to make our money grow, to make more money for us. We do not invest to support or be the fan of any company.
Rather we are the biggest fan of our money! Investing well means putting it to work doing what it should do. Bringing more money home to you!
Avoiding Costly Investing Mistakes No. Four, Bankrupt buying = sinks money
Avoid the turnaround money coma of waiting for a troubled company to turnaround and produce bottom line. This not a good investment strategy. That approach kills money or at the very best, can put it in a coma. Don't let your money die or sleep. Get your money out of losers and back to working for you elsewhere.
Turnarounds are specialty investing. I spent my business career doing turnarounds and have a record of getting the job done. However, few turnarounds are kind to small investors. Turnarounds can be fantastic investing opportunities for informed and experienced players. This is a very specialized area and certainly no place for an investing beginner. Learn first, gain investing experience and then we can talk about turnaround investing.
Avoiding costly investing mistakes No. Five. Averaging down = sinking returns
Three related mistakes are tied to losing investments. Winning investors do not hold losers. When they find a loser in their holdings they sell it as quickly as possible get back to holding a portfolio of winners.
Too many investors on significant drops in the price of an individual stock, hold on It is common and very normal human behavior. But it is a mistake. Too often holding on turns into the first of three related mistakes. Rule of thumb, the best move is selling as soon as you realize you hold a loser.
Compounding Errors
Compounding the first error of riding the price down, too many common investors expect to simply wait while the price recovers. Even when they realize they have a loser, they do not sell. That is a mistake.
That decision means they may wait for months or years holding a losing position. That is essentially dead money. That is mistake number two. Rather, get the money out and into a money making winner.
Mistake Three
Mistake three often occurs should prices recover. Often poor investors ride through months or years sitting on dead money only to sell when the stock price rises to their original investment price. They think, with great relief, I got my money back!
Selling at that point makes certain they have no upside opportunity. It also ensured that waiting for your return to zero has kept your money away from any profitable investment. That is opportunity cost. The cost of missing the positive investment opportunities instead of holding dead money.
As soon as you can, bring dead money back to life. Only invest in stocks that make you money.
This combination of three mistakes is common, normal but costly investor behavior. You are fooling yourself to think that loss is not real until you sell. The best loss possible is the first loss. As soon as you know you have made a mistake, take the hit, sell and get the money to work making money.
Avoiding costly investing mistakes No. 6. Distracted investing = cash crush
Investors that don't pay attention to their investments do poorly compared to successful people who do pay attention. Superior investors get results because they pay attention, do their homework and take action when necessary. Investors distracted by life or any part of it can be distracted and miss opportunity, necessary actions or worse, trouble.
Too many common investors, using a financial advisor or doing their own investing, make this mistake. It is your money and your future that is at stake. Paying attention pays off for a lifetime.
You have to pay attention to your healthcare. You have to pay attention to your safety. And you have to pay attention to your financial future. Even if you use an advisor, keep yourself aware and informed. That pays you with huge returns.
Superior investors are not normal, they are exceptional
To get superior results you must make superior choices and take superior actions. Take action and sell when you know you have a loser in your portfolio. Do so and get the money to work making you money. That simple change will make your portfolio sharply outperform investors that stay with losers. Selling losers gives you a key strategic advantage and makes you money!
Weeding losers out of your portfolio regularly puts more money into your pocket. Avoid the 6 sins of new investors and move a big step forward on the path to becoming a superior investor! Buying losers, averaging down and making investments without paying attention. Links to all seven parts of the series are at the end of this post.
What common mistakes should investors avoid? Answered!
This lesson covered the most common avoidable errors that harm investors. Knowing and avoiding these errors can significantly improve portfolio returns and your wealth building efforts.
Lesson takeaways, Avoiding Costly Investing Mistakes: Choose a Strategy with Better Returns
Avoiding costly investing mistakes improves your portfolio results by avoiding errors and finding quality investment opportunities. Errors of investing on news or turnarounds without research, holding losers or averaging down and not paying attention have big costs.
- News only investing = bad news!
- No research risks no or poor returns.
- Holding losers kills money. Sell losers and buy more winners.
- Bankrupt and turn around investing is high risks with many failures.
- Averaging down is a losing strategy. Sell losers, buy more winners.
- Distracted investing is investing without paying attention.
Other Lessons Related To: Avoiding Costly Investing Mistakes: Choose a Strategy with Better Returns
Momentum investing trading play
Income value and growth investing
Tapering groupthink costs investors!
Investing trading and speculating differ
Comments and questions welcome
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Investment choices of Superior Investors:
Choices to make money work,
lesson links:
Overview of investment choices Lesson 290.01
Key investing success choices Lesson 290.02
Join exceptional wealth builders Lesson 290.03
Investing time or adviser time? Lesson 290.04
Media exposes advisor incompetence Lesson 290.05
Small investors have advantages Lesson 290.06
5 Secrets of superior investors Lesson 290.07
Avoiding costly investing mistakes Lesson 305.09
Investment impatience destroys wealth Lesson 290.09
3 Yeses or no investment Lesson 290.10
Investing can be fun, interesting and slow Lesson 290.11
Warren Buffett explains gold Lesson 290.12
Stock trading halts explained Lesson 290.13
FAQ about money making investment choices Lesson 290.14
FAQ about financial and investment advisors Lesson 290.15
Next lesson: Investment impatience destroys wealth
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