The Motley Fool

4 mistakes wise investors don’t make

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Happy retired couple on a beach
Image source: Getty Images.

Like any skill, becoming good at investing requires time, effort and a willingness to learn from your mistakes. The last of these is arguably the most difficult. No one likes to dwell on their failures for too long, especially those that also involved losing money. That’s why I recommend learning from others as much as possible.

Here are four things most experienced investors know that hold people back from stock market success.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

1. Not having a plan

Failing to understand your reasons for investing is a classic error. “To get rich” isn’t specific enough. “To be as rich as… (insert name of celebrity/neighbour/arch-nemesis here)” should also be avoided. 

So, let’s get real. Identifying a financial goal — be it saving for a house deposit, a child’s university tuition fees, or retiring from the rat race early — has huge implications for your risk tolerance and subsequent investment strategy. It can mean the difference between focusing on established blue-chip companies that pay dividends to high-risk, high-reward, small-cap stocks. 

Another thing to recognise is that circumstances change. Financial planning is, therefore, a fluid process. 

2. Doing what everyone else does

While some derive intellectual pleasure from it, active investing (a.k.a picking stocks) is only really worth the trouble if you’re able to beat the market. That’s hard, even for fully-resourced professionals, hence why so many get an average return by following the herd.

Then again, wise private investors know they have a few things in their favour. With no requirement to justify their salaries on a regular basis, they have the freedom to zig while others zag. They can take advantage of stocks whose share prices are temporarily depressed and buy promising companies that most professionals are prohibited from touching. This makes it easy to generate a return that’s different from the market. 

There’s just one key point to realise from going your own way. You also need to be right. 

3. Failing to diversify

Many fortunes have been lost on the failure to spread money around. That’s why embracing diversification is so important. Throwing all your cash at one set of businesses because you believe that sector will outperform could lead to huge returns, but the reverse is also true. 

Failing to diversify even on a macro level can compromise returns. Since the depths of the financial crisis, the FTSE 100 has increased 90% in value. The US stock market, by constrast, is up roughy 280%!

Investors choosing to cast their net to include stocks from over the pond would have likely got a far better return. Like most things in life, balance is recommended. 

4. Ignoring costs

Performance can be less-than-optimal even if you manage to pick the right stocks because of the costs involved.

That you’ll generate charges is the only outcome you can be sure of when you’re investing. The more active you are, the bigger they’ll be since every buy/sell instruction to your broker involves paying commission. It’s worth bearing in mind that doing as little as possible can often be the most profitable strategy.

Another consideration is tax. Wise Fools know that holding stocks outside of an ISA or SIPP means paying tax on whatever you make. This can have a huge impact on how much money is compounded over time and what the result will be at the end of the journey.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.