‘Learn from the mistakes of others, you can’t live long enough to make them all yourself.’ – Eleanor Roosevelt
While it may be tough to admit, everyone makes mistakes throughout their investing careers, whether it be a missed opportunity or the opportunity you wish you missed. Ultimately though, a well thought out investment plan is far more likely to end in success than failure and keeping your funds ‘safe’ in a deposit account is a surefire way to lose money as inflation slowly erodes your earnings.
To help you avoid the most common investment pitfalls, here’s a quick list of some basic mistakes that new investors make.
Remember, time in the market is much more important than timing the market. You don’t need to make a huge decision regarding your life-savings all at once. Start small but start now. After that first step, it all gets a little easier.
On average, the stock market has returned around 10% annually since 1974 (without factoring in inflation). That easily beats the negative returns you’ll get by keeping your money in a savings account, once inflation is factored in.
Far too often, novice investors throw all their savings into stocks thinking they can sell them off whenever they need the money back. This isn’t a bank account. If you need the money in the middle of a downturn, you may have to sell at a loss.
Emergency funds create a financial buffer that can keep you afloat in times of financial strain, preventing you from dipping into your portfolio at the least opportune time. The need for an emergency fund should not be overlooked. It is a hugely important factor, providing you with the freedom to invested in the market long-term, without interruption.
The size of your emergency fund will depend on your financial circumstances, but a good rule of thumb is to try and gather between 3 to 6 months of living expenses. If you have a mortgage, kids etc., you may want to be on the higher end of this. If you have few overheads and strong job security, then 3 months may work for you.
All of your emergency funds don’t necessarily need to sit in cash. The majority of this can sit in a money market fund. These funds are intended to offer investors high liquidity with a very low level of risk; unfortunately, they offer low returns to match.
Playing it Safe
If you’re young, go long, take some risk. You have time to weather the inevitable pits and troughs of the market and still emerge victorious.
With that said, don’t rush out and throw all your money into penny stocks with dreams and aspirations of guaranteed riches. Remember, the number one rule in investing is ‘stay in the game’ so make sure the risk you take is calculated.
Older investors don’t have that luxury of time. You know the expression “time is money?” Nowhere is that more true than in the stock market. Use your time when your young to invest in assets with the potential for long-term growth.
Following the Crowd
If following the crowd worked, we’d all be millionaires.
You see it all the time, a temporary market slump brings hysteria, and previously level-headed investors throw their long-term investment plan out the window amidst all the panic, selling at the least opportune time. Just this year, we saw markets fall over 30% only to hit all-time highs six months later. Many of those who sold at the bottom remained on the sidelines during the subsequent market rally, no doubt licking their financial wounds.
It’s worth noting that this is a two-way street. Everyone’s investment history is tainted not just by realized losses but by the ‘ones they sold too soon.’ Realizing profits too early can have a detrimental effect on your portfolio returns over time. Most investors will be lucky enough to be invested in a handful of mega-growth stocks in their lifetime. How they manage these investments is imperative to their portfolio’s overall success.
The one you sell too early may often haunt you more than the loss you actually realized. While it’s tough to accept losing say, 30% of your position on a specific investment, selling your position for a small profit, only to see that asset jump 1000% a few years down the line can be a harsh life lesson. Take it from me, I sold out of Shopify in early 2019, but the less said about that, the better….. remember what I said earlier ‘we all make mistakes’.
You’re going to go through periods where every fiber of your being is telling you to sell a stock you still believe in because of some temporary slump or a brief spike. Stick to your guns, and over time you’ll reap the rewards of a long-term investment strategy. Keep changing your mind, and your returns will be eaten away by your indecision.
For many investors, a great way to avoid the mental anguish that comes with watching your stock picks rise and fall is to invest in a broad basket of stocks through an ETF. This passive exposure allows you to participate in the rising tide of the market without getting caught up in the individual stock movements, keeping the aforementioned behavioural fallacies at bay.
Mind Over Matter
Successful investing has nothing to do with IQ. Some of the graph wielding statisticians may try and convince you otherwise, but ultimately, your mindset will determine your success. It is temperament that distinguishes an average investor from a great one.
A successful investor has the ability to remain calm and keep their head when all around them are losing theirs.
Top tip: Make all investment decisions with a cool head after letting new information or temporary market swings sink in. Remember, sometimes, the best action to take is no action at all.
“Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble.” – Warren Buffet