Investing can often be made to sound simple, but at times it can feel tough. When the stock market is falling it is easy to feel negative. However, I believe that over the long term, most investors can make money from the stock market. Avoiding these common mistakes is one way to make the journey much smoother and hopefully far more profitable too.
Overtrading
The problems with dipping in and out of shares too frequently are twofold. On the one hand, you as an investor will incur significant brokering costs over time and, even within an ISA wrapper, certain taxes on dealing in shares.
The second problem is the opportunity costs of not holding onto winners. By overtrading, you deny yourself opportunities to benefit from the gains of rising stocks while increasing the risk of picking up shares in stocks that could then fall.
Failing to diversify
By failing to invest in shares from different industries and geographies you fall into the classic trap of having all your eggs in one basket. For example, an investor who’s only holding UK stocks in recent years will likely have underperformed the market because the US and India have had far stronger performing stock markets.
It’s far better from a risk management point of view to spread investments out either via investment trusts or by investing in FTSE 100 companies with significant overseas earnings.
Taking it too personally
There’s been a lot written about the psychology of investing. It can be all too easy to become attached to a particular company or investment style. Critical analysis and subjectivity of investments is very important in order to be a successful investor. It’s important to ask yourself whether a stock really is worth still owning.
At the end of the day, you need to be ready to drop a share that no longer matches your investment criteria or where the reason for investing has gone. Becoming personally attached to a company makes that harder, so try to avoid it.
Buying and keeping losers
Probably because of the emotion involved in investing, holding onto share prices that are fast going downhill can be all too easy. It’s happened to just about every investor, but can seriously hurt returns. Even if you believe in the reasons for investing in a company sometimes, it’s better to take a small loss, move on, and buy the shares once the price starts to show signs of recovery.
Similarly, it can be tempting to be contrarian and look to buy shares that are very cheap – for example those with low price-to-earnings ratios and probably high dividends as well – but it’s best to be aware that these “losers” can keep falling, so don’t fall into the trap of buying and holding a share just because it appears cheap.
I hope recognising and avoiding these four mistakes will help you in your investment journey and to get more out of your stock market investments.
