Making mistakes is all part of investing. Even top investors such as Warren Buffett make mistakes at times. However, there are a number of basic errors a lot of investors make time and time again.
With that in mind, here’s a look at four I can guarantee many FTSE 100 investors will make next year.
Only owning a few stocks
One mistake many novice Footsie investors are likely to make next year is only owning a few stocks. There’ll be plenty of investors who own five stocks or less.
The problem with only holding a few stocks is that it results in a high degree of stock-specific risk. If one or two of those stocks in a five-stock portfolio underperform, the overall portfolio value is going to take a large hit.
To reduce your risk, it’s therefore a good idea to diversify your money over many different stocks.
Not diversifying outside the FTSE 100
Another basic mistake is investors not diversifying their portfolios to include businesses outside the FTSE 100.
While the FTSE 100 index contains some brilliant companies, it’s not perfect. For example, it only contains large-cap stocks (many of which are struggling to grow) and it has very little exposure to the fast-growing technology sector. As a result, investment returns from the Footsie can be somewhat underwhelming at times.
Therefore to give yourself the best chance of generating decent investment returns, it’s a good idea to own some stocks outside the FTSE 100. This means mid-cap and small-cap stocks, as well as international stocks.
Panicking when the FTSE 100 falls
One mistake I can guarantee many investors will make next year is panicking when the FTSE 100 falls. This happens every time there’s stock market volatility.
Panic tends to lead to irrational decisions. To be a successful investor, you need to be able to stay calm and make rational decisions when stock market conditions are challenging.
Stock market weakness can also create amazing buying opportunities. Unfortunately, many investors miss out on these opportunities because they’re stuck in panic mode.
Putting too much focus on valuation
Finally, another mistake many FTSE 100 investors are likely to make next year is putting too much focus on stocks’ valuations (P/E ratios). They’ll buy stocks simply because they’re ‘cheap’.
Don’t get me wrong – a stock’s valuation is important. Yet putting too much focus on valuation can backfire on you. Cheap stocks are often cheap for a reason. And quite often, cheap stocks just keep falling and become even cheaper. Just looked at BT shares – they’ve been cheap for years now and continue to keep heading lower.
Ultimately, when picking stocks, it’s important to look at a number of different factors, including revenue and earnings growth, profitability, and balance sheet strength.
Edward Sheldon has no position in any 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.