Financial professionals like to make investing seem a complicated task only left to professionals on Wall Street in smart suits and impressive office blocks, but it's quite possible to successfully invest your own savings for fees as low as $10 a trade with many online brokers.
It might seem a daunting and risky task at first, but you can uncomplicate share market investing by remembering some simple rules to follow and common mistakes to avoid. Let's take a look at some common mistakes made by private investors and how avoiding them can improve your returns.
- Panicking about short-term price falls – this is probably the commonest amateur investing mistake whereby an investor sells at a loss just days, weeks, or months after buying shares. Consider that two different people could buy the same stock, on the same day, for the same price, but one records a 10% loss and the other a 200% return. Shares will nearly always fall from your original purchase price in the short term, but that's no reason to sell if the company you've bought is still performing to expectations.
- Putting all your eggs in one basket – this is probably the most amateur investing blunder of all where you don't diversify the risk by spreading your investing funds out across different stocks and sectors. If you put all your money in just one stock your portfolio could lose 10% – 50% or more over just a few weeks. Nothing is certain in the stock market and even the best companies can suffer severe problems, which is why you should always spread the risk.
- Paying too much for fast-growing stocks – your returns are always a function of the price paid for a stock. So even if you buy the best companies in the world your returns may be sub-par if you've paid too much for the shares. If you simply buy the hottest tech stocks of the day like Wisetech Global Ltd (ASX: WTC), or strongest companies like Cochlear Ltd (ASX: COH) with no regard to valuation your portfolio may fall in value, while the market rises.
- Buying "cheap stocks" based on old share prices – looking for stocks at 52-week lows or "bargain hunting" in the stock market is often a recipe for atrocious returns. Share prices are a function of future expectations and if they're falling over longer periods this means the market's expectations are poor. As such you're putting the odds against yourself in bottom-fishing for turnaround opportunities like Myer Holdings Ltd (ASX: MYR) or iSentia Group Ltd (ASX: ISD).
- Refusing to change your mind – this falls into the problem of becoming too emotionally attached to a stock or company and refusing to sell or take losses even if the company is reporting serious problems subsequent to your share purchase. Companies that reported big problems recently include Slater & Gordon Limited (ASX: SGH) or ResApp Health Ltd (ASX: RAP).
- Worrying about politics – Brexit, the Greek debt crisis, North Korea, and the U.S. presidential election, there's always some political event to worry about, especially with today's 24-hour news cycle needing to be filled. However, the truth is just about any fool could be U.S. President and the economy would still keep humming along. In fact as famous fund manager Peter Lynch said more money has been lost in trying to predict market crashes, than in the actual crashes themselves. As such selling your shares in anticipation of a political blow-up is almost always a losing investment strategy.
Now you know some of the common investing mistakes to avoid, why not assess how some of The Motley Fool's favourite picks buy stack up against your investing check list….
