Common Investing Mistakes
December 24th, 2008 |Investment mistakes are costly. If you are able to avoid the investment mistakes listed below, you would already find yourself in the top one percent of all investors.
Investment Mistake: Buy and Pray
Most investors have an inverted investment mentality. They cut their gains short and run their losses long. This mentality derives from the basic tendency to avoid losses. Whenever a stock moves against them, investors tend to want to avoid realizing their mistakes, and resort to the ‘buy and pray’ approach to investments. They pray and hope that the stock will soon rise in value again so they can recoup their losses.
On the other hand, many investors do not hesitate to cut their gains short, as even a small gain would make them ‘right’. They would have made the right decision since they would make a profit, no better how small. You need to reverse this natural tendency to succeed as an investor: instead seek to cut losses once they have reached a certain point, and let your profits go long as far as possible.
Investment Mistake: The Herd Mentality
The crowd doesn’t know best - you do! Unfortunately, most people are stuck to the herd mentality: if everyone is buying, buy; if everyone is selling, sell. This is especially true in the midst of a speculative bubble. Especially when everyone seems to be boasting about the profits he is making, it is difficult for you to discipline yourself and believe in looking at the intrinsic value of the stock.
Yet, the contrarian view often works better. When even your waiter is offering stock tips, that’s the time when you should be careful and look towards starting to sell. When everyone is complaining about being burned by the market, that’s when the true bargains are starting to emerge.
Investment Mistake: Forgetting costs
Do note that the higher the costs, the lower your returns. This is a financial truth that will always hold true. Your top priority should always be to shop for the most cost-effective financial products that you can secure, regardless of whether it is insurance, mortgage or broker commissions.
Investment Mistake: Hot Tip Investing
Hot tip investing is actually no different from herd investing. The pundits say it is right, so it must be right. Always make the investment decision yourself - rationally decide if the company is truly a bargain; these hot tips are likely to become their worst investments in your life.
Investment Mistake: Overconfidence
Beginners tend to ironically be the most confident about their investment skills. Many novice investors thought they were geniuses who couldn’t fail in 2000 - until the bottom fell out of all their portfolios.
Yuen is a financial expert, personal finance specialist and motivational speaker who writes for the Financial Freedom Guide and other major financial blogs. His writing emphasizes financial independence and the creation of long term residual income streams. Read his success story at Site Build It Reviews.
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