What are the main mistakes when investing? How to avoid them?
All investors make errors, even Warren Buffett. Ask him.
Nobody is perfect. We are all going to have our wins and losses. You have to know, some of the mistakes you might make when trading or investing in stocks is actually pretty common. They are not unique exclusively to you.
The biggest risk investors are most likely to face is their own cognitive prejudices. You should never work against your own best interest by making foolish, emotion-driven mistakes.
The first in the row is lack of rationality.
Our general trend to investigate for more report, study the models, analyze choices, is excellent for directing us to the incorrect idea. And that can make us see patterns where there are none. But the same emotional tendencies are also our biggest burden when we’re investing. In other words, our brain is to blame for all those boneheaded money mistakes.
What is important to take care of?
Investing in stocks requires a minimum five-year time horizon. You have to forget that money.
Use your other money to take care of the other chores, to pay car repairs, a house. Whatever.
But we live in a short-term world. Hence it can be hard to be a long-term investor in a short-term world.
Victorious investors have the strength to endure when everyone nearby them is getting crazy. That makes the difference between investors who constantly beat the market and investors who catch a fortune from time to time.
When some students asked Buffett why only a few investors were capable to replicate his investing success, he answered: “The reason gets down to temperament.”
There is nothing to correct if your investment is dropping by 50%. You have to stay calm and ignore the noise. In order to be ready to come back to the game.
Remember, never sell out at the most critical times.
There are no fortunes made by shifting in and out of stocks led by panic and greed. The recipe is to buy great companies and investing in them over a long time.
Develop immunity to the emotional triggers that can take you to bad investment decisions.
Spread out your risk
You need a substantial asset-allocation plan. Meaning a portfolio with a collection of investments. You must have a diversified portfolio.
Putting eggs in different baskets isn’t the only way to disperse the risk.
For example, don’t invest in a company at the wrong time. Or maybe you just don’t know when to pull the trigger.
How to avoid this? Buy in threads.
You can grow your stocks over time by investing a small amount. That means, every month for five months you purchase $400 of some company’s stock no matter what is the stock price. The advantage of this system: if and when the stock drops in price, you can buy more, and when it jumps, you can buy less.
Anchoring to purchase price
Never pay too much attention to the price at which you bought a stock. Take care of its current trading level.
For example, you bought a stock at $50. Suddenly it jumped to $52, or it dropped to $48. You will end overwhelmed with emotions if you estimate that stock through the concerning of how much you paid for it.
The $50 buying price or any other price you pay for your stock is absolutely pointless. Hence, taking that as an anchor is a deadly mistake. Look at the future.
Use stop orders. In case the bottom falls out of stock, it should protect you and your investment.
Learning the wrong lessons
Drawing the wrong conclusion from past mistakes can also negatively impact investors’ trading decisions.
Past is not elementary. The future will be very different from past averages. So the problem with experience is that sometimes you learn the wrong mistake. Investors have injuries because the market is knocking them. And what they do? Some blame short-sellers, or the investor base. Well, investors don’t often take responsibility for their own performances.
Don’t make the mistake of wasting your time on the choices that will make a small variation.
Never attempt to pick the hot stock. Even the specialists who live this essence make regular failures at that job.
Rather, use your time to establish your right asset allocation for classes and strategies.
Why we are pointing this? For example, most studies employ average holding periods of 30 years or more. Even if you hold an investment 40 years, your medium holding time will be shorter than half that time.
Who starts investing at her or his 30s with a huge lump-sum and retires at 60s to perform a 30 year holding period on one investment? Life never has that plan.
Remember, only 5 of the 103 years had returns between 5% and 10%. Unmistakably, the “average” is far from ordinary. It’s statistics.
The chance is what makes someone a thief, so similar when good preparation meets opportunity, that’s when great investments are made.
Invest smart, build your wealth. Retire early and live free.
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1/8 – What is bottom-picking?
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3/8 – What is a portfolio?
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5/8 – What is a dividend?
6/8 – What is the crucial rule of risk control?
7/8 – What is a support level?
8/8 – What is the quick acid test ratio?