Avoid Making these eleven investment mistakes
Here is my list of eleven common mistakes investors make when investing in equities.
1. Buying HIGH and selling LOW!
A lot of beginner investors panic and want to sell a stock or mutual fund when there is a large downturn in the stock market.
Having a Series 6 securities license allowed me to work at a mutual fund call center. If I remember correctly, this was back in 2001.
While I was working there my job was to buy and sell mutual funds over the phone for new and existing investors.
I would guesstimate that 99% of the calls I received were from investors who wanted to sell shares of their mutual funds.
One of the calls I took was for a sale of $7,000,000. The other transactions were for much smaller amounts of money.
Maybe these people should not have been investing in these particular mutual funds.
Had they invested in less riskier mutual funds they may not have sold during a down turn in the market.
Somewhere around the 2000 to 2001 time period, technology companies were taking off.
New technology companies were popping up like weeds and going public. People were investing in these new companies even though they were not making a profit.
I had some money in one or two technology funds and I was seeing my funds go up in value like you would not believe.
But, all good things have to come to an end sooner or later. The stock market dropped big time.
I was let go from this temporary position at the mutual fund company along with a lot of other temporary employees. It was a good experience while it lasted.
2. Investing in stocks when you have a low risk tolerance.
Knowing your risk tolerance should be one of the factors that affect your investment decisions.
As you get older your risk tolerance will decrease because your investment time horizon also shrinks. One thing that you can’t buy for any amount of money is time.
I would consider investing in technology stocks and technology mutual funds as high risk investments.
If you are within ten years of retirement I would be cautious about putting money into funds that have a large percentage of their investment portfolio invested in technology stocks.
The last thing you want to worry about is being able to retire at a certain age.
Full disclosure: I started buying a technology stock mutual fund about a week ago. Right now I have something like $20 in this technology mutual fund and I may put more money into this fund in the future.
I am very aware of the risks. To help limit my risks, I am going to be dollar cost averaging using very small amounts of money each time I invest into this fund as well as all of the other mutual funds I own.
3. Not doing research before investing.
At the very least, you want to know the performance of a mutual fund over one year, three years, and five years.
You also want to know the minimum investment and the minimum subsequent investment amount.
Find out if there is a load and how much is that load.
I only buy no load or very low load mutual funds because paying a load to buy or sell a mutual fund eats into the return on your investment.
Reading the prospectus will tell you all of this information as well as provide a list of the top ten stocks the fund invested in as of a certain date.
As you read the prospectus you can determining if the mutual fund is inline with your risk tolerance.
4. Investing in individual stocks with little or no knowledge of stock market investing.
Before investing a penny into any stock I suggest that you educate yourself on investing.
Learn the language, the numerous investing options available in addition to owning individual stocks, such as mutual funds and ETFs.
Don’t rush into purchasing a stock or any other type of investment(s) without doing your research
Failing to gain knowledge in investing and listening to advice from a financial advisor could result in the financial advisor recommending investments that have their best interest in mind instead of yours.
5. Investing a lump sum of money into a stock mutual fund or ETF rather than dollar cost averaging.
I am a big believer in dollar cost averaging. Dollar cost averaging is where you put a certain amount of money into an investment(s) on a regular basis.
The advantage to dollar cost averaging over time rather than making
a lump sum investment is that you will not be buying at the high or the low.
This cuts down your investment risk, especially during periods of a highly volatile stock market.
6. Selling mutual funds and/or ETFs in less than one year.
There could be a big tax bill if you sell the security in less than one year.
I am guilty as charged. My profit from both ETF sales combined was a little over ten dollars.
Please don’t quote me on the profit amount because it could be a little bit higher.
I am not an accountant. This should not be considered as tax advice. Seek tax advice from a qualified professional.
7. Investing money in the stock market you can’t afford to lose.
Never, ever put money into investments that you need to pay your rent, make a car payment or to buy groceries.
Investing money over a very short time period is extremely risky, even for the pros.
8. Investing without having a three to six month emergency fund.
It would be unwise for anyone to invest money into anything with risk to do so without having an
emergency fund built up to cover your income for a minimum of three to six months.
Unforeseen emergencies can pop up at any time.
9. Investing in a stock(s) everyone is talking about.
Buying a stock when everyone is talking about that stock is the worse time to purchase the stock. The
excitement people have in the company is driving up the price for the stock.
When everyone is buying the stock you should be selling. Buy low and sell high rather than doing the opposite.
10. Trying to time the market.
You may be very lucky and time either the top or the bottom of the market one time, but the chances of ever doing this more than once is extremely unlikely.
Instead of trying to time the market a better strategy would be to dollar cost average into the market.
11. Failing to diversify your investments.
Diversifying your investments is a smart strategy and cuts down your investment risks.
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