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The 6 Big Mistakes First Time Investors Make

Too many new investors set off with high hopes only to see them dashed after things don’t turn out as planned.

They don’t thrash the market, they don’t unearth a rich seam of ten-baggers, and they don’t get rich quick. Where did it all go wrong?

Here are the biggest mistakes I made when starting out, and more importantly, how you can avoid being so silly.

Mistake 1. Overrating yourself.

My first big mistake was thinking I had some innate wisdom that would give me an edge over the tens of thousands of brilliant minds who are also trying to get market-beating returns. Vanity, thy name is newbie investor. Don’t invest expecting to discover an overlooked gem that nobody else was clever enough to spot. There is no shame in buying low-cost tracker funds.

Mistake 2. Being impatient.

After buying a stock, I would check its value several times a day, waiting for it to spiral in value. If it didn’t instantly perform, I dumped it. That’s how I came to offload microchip manufacturer ARM Holdings after just three months. Three years later, it had risen by 400%. You have to give stocks time to grow.

Mistake 3. Trading too often.

The other disadvantage of being impatient is that you end up repeatedly buying and selling stocks, and the trading charges eat into any profits you might make in the interim. A buy and hold strategy is a good way to keep the charges down. As Warren Buffett famously said: “My favourite holding period is forever.”

Mistake 4. Running your losses.

I came seriously unstuck after recklessly pouring money into a gold mining minnow I had spotted on a tips board. Then I made an even bigger mistake by refusing to admit defeat. I clung onto the stock because I couldn’t bear to bank a fat loss, but my loss only got fatter and fatter.

Mistake 5. Buying on past performance.

Slow-minded beginners buy a momentum stock that has delivered the goods in recent months, on the assumption it will continue to grow at the same rate. Too-clever-by-half investors do the opposite, going “contrarian” on a stock that has just crashed, hoping to pick it up on the cheap. I have lost money both ways. Forget the past, what matters is where you expect the company to go next.

Mistake 6. Ignoring dividends.

Novice investors fixate on share price growth. Yet income from company dividends will generate around 40% of your long-term returns, if re-invested back into the stock.

Never underestimate the power of the dividend, especially in today's low interest rate world.

The FTSE 100 is packed with top stocks paying as much as 5% or 6% a year.

To find out how dividend-paying stocks can make you rich, download the Motley Fool's latest FREE wealth report How To Create Dividends For Life.

This explains how reinvesting dividends for growth will generate almost half your total returns from investing in stocks and shares.

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