Last time we learned eight common mistakes that investors make, but unlike the guys who actually made these mistakes, you didn't have to suffer the financial consequences of poor decisions. This time I'm going to talk about eight more common mistakes that a lot of guys make.
1- Not doing your own research
Chances are that you have more than a few friends with their own ideas about investments. The mistake that most guys make is taking their friends' advice at face value. This isn't to say that you shouldn't trust your friends. They could be right. But copying them without questioning them is like giving away your money and hoping it comes back.What to do instead: Find out where your friends get their information. If they have a broker that has made them a lot of money, ask for a referral. If they have their own strategy, ask them to teach you (it may not be the best strategy, but any worthwhile strategy should be able to hold up under the scrutiny of a student).
2- Gambling on penny stocks
With their low prices, penny stocks look like sexy investments. But there are two problems with such stocks. First, small prices typically mean smaller margins, so the transaction costs can eat you alive. Second, penny stocks are more susceptible to fraud and manipulation. While most penny stocks are legit, it's an area where crooks ply their trade.What to do instead: Penny stocks aren't for green investors, despite their price. Why? Because to make money in penny stocks, you need resources. Furthermore, transaction fees are likely higher when you're trading a high amount of stocks. Investing always means doing research, but you won't read about penny stocks in the business section, so you'll need the resources to dig a little deeper.
3- Being afraid to invest during bad times
For the most part, the economy moves in cycles. Boom years are followed by bust years. While you can't seem to keep guys away from investing in boom years, it's like pulling teeth to find investors in the bust years. Of course, there are more bargain investments in leaner times, so staying out of the market in those years can be a big mistake.What to do instead: Remember this rule: economic downturn is an investment opportunity. While that doesn't mean going all in when things turn south, it does mean that you should look at the market with a different eye. Don't be discouraged when things are tough, and don't follow the crowd.
4- Blindly following a broker
Do you have a friend who begins every sentence with, "my broker says..."? Well, so what? More than a few guys get burned by blindly following their broker's advice. Is he an expert? Yes. Does he have an agenda? Quite possibly. Does he have the power to predict the future? Of course not.What to do instead: You should listen to your broker. But you should also question him. Remember; at his core, he's a salesman, so he's trying to sell you something. Press him on details. Why is this stock the next great stock? Did he invest his own money in it?
5- Not staying on top of your investments
Some guys spend months doing research, setting up a diverse portfolio only to make their initial buys and go to sleep at the wheel. It's puzzling, but it does happen. The trouble is that the market won't call you before things change. As a result, a lot of guys wake up one day to find themselves busted.What to do instead: It depends on the type of guy you are. If the trouble is that you'd like to follow your investments but you just don't know how, you'll want to take advantage of the tools offered by your brokerage house. All brokers offer them and they work like household accounting programs. On the other hand, if you're just lazy (it happens), you probably shouldn't be so active in the market: look for mutual funds where you'll only have to review things on a quarterly basis.
6- Entirely selling a winner
When you make a profit, it's only natural to want to sell and take that profit elsewhere. Conversely, a lot of guys look at their losses and hold onto them hoping they'll get back to even. While those may seem like different problems, they have the same root cause: misallocating your money. While nothing is constant, the above strategy actually has you pulling away from winners and getting closer to losers, which doesn't make any sense.What to do instead: It's okay to take a profit (in fact, it's smart). But unless you think the bottom is going to fall out on your stock, don't sell it all -- hold on to some of the winner stock.
7- Trading too much
Being a trader or being active in the market doesn't mean making a ton of trades. But some guys make trades the way the rest of us order drinks (pretty much without thinking). While they may know what they're doing when it comes to the trade itself, what they're missing are the transaction costs. Each trade has a commission fee and each trade has tax implications. So, if your profit margin is slim, chances are it will evaporate with fees and taxes.What to do instead: Never let fees and taxes dictate your trading moves. If you have to change your position, do it. But don't ignore fees and taxes, and don't get trade happy.
8- Assuming that if you like the product, the stock is good
How often have you and your friends enjoyed a product (like a Krispy Kreme donut) and said that you should own stock in the company? Well, some guys incorrectly assume that a great product equals a great stock. But the truth is that there's more to a good company than a good product.What to do instead: Look at the product as a good starting point. Okay, you found the next big thing. Now do your homework. Learn everything you can about the company from its management team and its business plan to its stock performance. Then make your investment decision.
make money by avoiding mistakes
In total, I've discussed 16 common mistakes that investors make. Sadly, this is by no means an exhaustive list. The truth is that all guys make mistakes with their money. But what separates the winners from the losers are the guys who can apply what they've learned.A mistake is bad in and of itself, but it is insurmountable if you don't learn anything from it, because you'll likely repeat it.
Resources:
http://www.1source4stocks.com/articles/penny_stocks_to_avoid.asp
http://www.allbusiness.com/articles/PersonalFinance/4004-2419-2424.html
http://moneycentral.msn.com/content/P32796.asp
http://www.detnews.com/2004/money/0408/23/d03-249913.htm
http://www.fool.com/news/commentary/2005/commentary05060202.htm
http://biz.yahoo.com/special/mistakes04.html
http://www.rediff.com/getahead/2005/jun/07stock.htm
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