Investing is not a precise science, it’s an art, and occasionally things go wrong.
Mistakes are all part of the investment process. Even the world’s best investor, Warren Buffett, has made some significant mistakes over the course of his career. One of the largest was his multi-billion pound investment in retailer Tesco, before the group’s accounting crisis. When he eventually sold, his “thumb sucking” resulted in losses of just under half a billion dollars.
Here are the five most common mistakes every investor makes and advice on how you can avoid them.
Buy high, sell low
Every investor is aware of the famous investing adage “buy low, sell high.” In reality, however, it is often the case that investors end up buying high and selling low.
The best way to avoid making this critical mistake is to avoid trying to time the market altogether by using a monthly investment plan. By investing a set amount once a month, on one pre-defined date removes any temptation to try to time the market and you will also benefit from pound cost averaging.
Lack of research
Another common reason why inexperienced investors lose money is that they don’t do their research.
Warren Buffett is such a successful investor because he spends months analysing companies before investing. Before buying any shares in Coca-Cola, for example, he reportedly spent weeks reading 100 years of the group’s annual reports.
Spending weeks reading annual reports might not be your idea of fun, but if you want to be a successful investor, rigorous due diligence is critical. You wouldn’t buy a new car without researching the product, so why would you invest your hard-earned money without doing the same?
Keep costs low
In reality, there are only two things we investors have control over, which are costs, and when we buy and sell.
Keeping costs as low as possible is critical if you want to be a successful investor.
According to my figures, if you invest £1,000 in a fund, at an initial cost of 3% and an annual management charge of 2%, over the course of 10 years, assuming an average annual return of 6%, you will pay £340 in fees and the final pot will be worth £1,451. Without fees, the investment would grow to £1,791, a difference of 23%.
This simple example shows just how damaging high fees can be to your returns.
One of the most common reasons rookie investors fail is because they overstretch their finances.
To be a successful investor, you need a long-term time horizon. If you’re investing money you can’t afford to lose, it may be difficult to lock your funds away for an extended period. It could also cause you to panic if stocks fall.
If you can’t afford to invest today, it might be best to wait until you’re in a better financial position.
Finally, all investors should have humility. What separates an average investor from a great investor, however, is how they deal with their mistakes.
The best way is to acknowledge the mistake, learn from it, and move on.
These tips won’t guarantee investment success, but if you follow the advice above, you can significantly improve your chances of achieving financial independance from investing.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Tesco. 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.