FOOL SCHOOL
Top 5 Investing Mistakes

March 6, 2002

We all make mistakes when we're investing. You are never going to make it through your investing life without selecting some turnips upon the way. But there plenty of things you can do to minimise the turnip content of your investing diet.

1 – Becoming emotionally attached to your shares

Never fall in love with a share. It won't return the favour. In fact it's more likely to turn round and bite you on the bum. If you have put a lot of research into an investment or held a company for a long time it's very easy to become fond of a business. However, this just clouds your judgement. When you make a decision about whether to buy a share, sell it or continue holding, you need to judge it impartially and stick to the facts.

2 – Concentrating on what price you bought at

Once you have actually bought a share, the price which you have paid is irrelevant to any investment decision. Its only use is to measure what return you have made on the investment. From a decision point of view, all that matters is the price now and what you think the price will be in the long-term or when you propose to sell it. Nobody else cares about what the price happened to be when you bought. So why should you?

3 – Listening too much to what other people think

There are lots of opinions out there. But they are only opinions. By all means listen and learn from them but take them all with an appropriate dose of salt. Some will be more informed than others but when it comes to your investment decisions you need to accept responsibility yourself. If you feel you need to rely on someone else's view for what to buy and what to sell, then you are probably not ready to be buying individual shares yourself. It's nice to have a comfort blanket but it may not always be there. In fact it probably won't be when you need it most.

4 – Trading too much

Some people are born traders. They can sense when and how prices are going to move. But it's a very rare skill and the odds are that you don't have it. All else being equal, excessive trading means that you incur more in the way of costs and that will eat into your investment returns.

5 - Worrying about the short-term direction of the market

The financial press is obsessed with the latest economic data and which direction the market is heading next week. Quite frankly, the average investor has enough to worry about choosing and monitoring their investments. Anything else is a pointless distraction. If you believe that the stock market will continue to outperform cash over the long-term, then trying to second guess what everyone else will do next week will only mean you take the eye off the ball.