10 Investment Mistakes You Must Avoid for a Successful Investing Future
We all make mistakes; even I do from time to time. Use the following to stay on track and avoid silly losses or decisions to improve your long-term investing career.
Success in investing isn't about being the smartest, fastest, or having the best fundamental or technical analysis. It's about using common sense. Don't get overwhelmed by metrics, analyst ratings, or tons of articles; simply rely on common sense.
Lets get into it shall we!
1. Being Too Active
Investing for the long term entails conducting thorough due diligence on a company you admire, establishing boundaries for what to anticipate and what not to anticipate while invested in the company, and then simply sitting back and enjoying the ride. Being too active emotionally entangles you in your position. Once that happens, you're in trouble. Constantly fretting over your position throughout the day is not the essence of investing.
Apart from the emotional attachment to your investment, the expenses associated with opening and closing positions can devour your net profit. Let's consider the costs incurred with my broker for opening and closing a position and run some calculations.
Imagine you open, adjust, and close three trades a month. Seems reasonable, doesn't it? WRONG! This means you've executed three opening, three closing, and three adjustment maneuvers, totaling nine. My broker levies €2.00 for each opening, closing, and adjustment. Let's crunch some basic numbers.
9 x €2.00 = €18.00 per month solely for the costs of these actions. It might not seem like much, but when compared to your portfolio, it could hit too close to home.
If you have €10,000 invested, €18.00 amounts to 0.18% of your portfolio. This implies you need to generate a 0.20% return every month solely to cover action costs. Redirect this money into your own pocket or your portfolio for compounding—don't hand it over to the broker.
2. Information Overload, Error Error.
After conducting your due diligence on a company and acquiring shares, it's time to filter out the noise. Resist the urge to track every piece of news concerning the company. While it's essential to monitor critical reports and ensure your envisioned trajectory aligns with reality, remember that you're in it for the long haul. Short-term narratives shouldn't sway your decision-making or lead to irrational actions.
The media often magnifies minor events, causing unnecessary doubt and prompting reconsideration of your investment strategy. This can be detrimental to both you and your portfolio in the long run.
Stay committed to your plan!
3. Invest in What You Know(!)
This should be self-evident, yet many individuals still flock to "hot" stocks and rely on others' stock picks because of the compelling narratives surrounding them. However, succumbing to such stories and feeling compelled to invest in specific stocks is unnecessary.
When purchasing a stock, you might have conducted some superficial research to justify the investment. But if you neglect critical thinking and fail to be realistic about the company, perhaps not even understanding its core business or revenue sources, that's ludicrous.
Identify your comfort zone and areas of expertise, then enhance and master them. If you specialize in the fintech sector, capitalize on your knowledge and invest in fintech-related companies. This approach allows you to comprehend the business and stay abreast of market trends relevant to your investments. Conversely, if you venture into consumer goods randomly without sufficient expertise, you'll find yourself questioning every move the company makes because you lack familiarity with its offerings or operations.
Stick to what you understand.
4. Control Your Emotions
The market is heavily influenced by people's emotions. Witness a significant sell-off? It's often driven by fear as investors focus on short-term concerns that, in hindsight, typically aren't as severe as perceived (though it's crucial to investigate and make your own assessment). When you observe a stock price plummeting without a solid reason, refrain from selling simply because you're experiencing losses or are in the red.
If your research indicates that the market is overreacting and your investment thesis remains intact, why panic and sell? Remember, markets can be irrational; don't succumb to their volatility.
5. Have a Plan!
Perhaps I should have emphasized this point from the start. Entering the market without a clear vision of your end goal is not the wisest approach. You require a well-defined plan outlining when to buy, sell, become more active, or adopt a passive stance. Additionally, you need guidelines for depositing and withdrawing funds. Having such a plan is essential for avoiding irrational decisions that could incur significant losses.
Treat your investments with the same level of seriousness as you do your work, family, and personal life. Just as you wouldn't leave these aspects to chance, don't approach investing without a strategy. Plan your actions and how to execute them to avoid unpleasant surprises. After all, certain surprises are best avoided.
6. Diversify
I might just be echoing what countless others have said, but it holds true today and for the foreseeable future: diversify your investments. Don't construct a portfolio like the one listed below as an example:
Adyen
Paypal
Visa
Mastercard
Block
Global Payments
Shift4 Payments
Paysafe
Why? Because they all operate within the same sphere, environment, and sector! By investing solely in the fintech sector, you're fully exposed to its fortunes. If this sector encounters difficulties for any reason, your entire portfolio could suffer. Without other companies to fall back on, you're left vulnerable. Diversification not only brings peace of mind but also ensures a more sustainable future for your investments.
7. Mistakes (Do Not) Happen
They do, indeed!
On social media, every "guru" portrays themselves as consistently achieving incredible returns and never faltering with their stock picks. Why? Because they're highly selective about what they share and what they keep hidden. Often, these individuals sell courses—although, more often than not, these courses offer little value—and they need to market them effectively. They accomplish this by creating the illusion of infallibility, making it seem like nothing can go wrong and that they always come out on top.
However, we're all human, and we all make mistakes. Making mistakes is part of the learning process and is essential for growth as investors. As long as you glean lessons from your mistakes, you're on the path to achieving greatness in your investing journey.
Embrace mistakes, enjoy making them, and most importantly, learn from them.
8. Don’t Try to Time The Market
Timing the market often results in leaving potential profits on the table. If you've conducted thorough research on a company and determined that the current price represents fair value, consider investing in the stock. Attempting to wait for a lower entry point because the market has been bearish recently is a risky endeavor, as market conditions can change unpredictably.
The key is to focus on time in the market rather than trying to time the market perfectly. Evaluate the fundamentals of the company and make your decision accordingly. Trust your analysis rather than attempting to predict short-term market fluctuations.
Take a look at the graph below and form your own conclusions!
9. Power Of Compounding
Let's say you invest $10,000 in company XYZ. In the first year, the shares appreciate by 20%, making your investment worth $12,000. Encouraged by this positive performance, you decide to retain the stock. Moving into Year 2, the shares again rise by 20%, transforming your $12,000 investment into $14,400.
However, it's crucial to note that the increase in value during the second year isn't another $2,000 (20% of $10,000), but rather an additional $400. This is because the initial $2,000 gain from the first year contributes to the growth, thanks to the 20% appreciation.
When you extend this process over time, the numbers become substantial as your prior earnings generate further returns. For instance, if you invest $10,000 at a 20% annual rate for 25 years, your investment could soar to nearly $1,000,000 without any additional contributions.
The concept of compounding is often attributed to Albert Einstein, who purportedly referred to it as the eighth wonder of the world. According to the story, he also remarked, "He who understands it, earns it. He who doesn't, pays it."
10. Understand Risk
Investing, like any endeavor, carries inherent risks. One such risk is the possibility of a company facing bankruptcy or rapidly losing its value. Unfortunately, this scenario is not uncommon. Many seemingly promising companies have collapsed due to fraudulent accounting practices, where management manipulates financial records to create a false impression of operational and financial health. As a result, investments in these companies can become worthless seemingly overnight.
It's essential to remember that when opening a position in any investment, there's a chance that it could ultimately fail and become worthless.
In life, as in investing, risk is an inherent part of the journey.