Cut your risk by avoiding these 5 stock market trading mistakes

No matter what kind of investing approach you follow, we feel that you can improve your overall results — and cut your risk — by avoiding these 5 common investment errors.

1. Failing to follow a realistic stock market trading strategy: Some investors, particularly newcomers, plan to buy a few hot stocks (or funds, or options or futures), and double or triple their money in a few years. Then they’ll settle into a low-risk investing style that may only return an average 10% to 12% yearly. But if you could make 200% or 300% in a few years, why would you quit? If you could do it once, you should be able to do even better as you gain experience.

Of course, if you doubt that you can keep it up indefinitely, you should also question whether you can pull it off the first time. The best stock market trading style for most investors is one that will work for them more-or-less indefinitely. You’ll want to be sure it suits your circumstances and temperament, that it won’t take up too much of your time, and that it doesn’t require luck or extraordinary circumstances for success.

2. Putting too much faith in trends: It pays to keep in mind that the stock market anticipates things, and no trend lasts forever. Stocks put on lengthy downturns due to business and economic problems. The downturns go into reverse long before the problems get solved.

Remember, a highly dramatized story is far more entertaining than a straight explanation of facts, and more absorbing. But don’t let entertainment value, or your degree of absorption in the story, warp your judgment.

In today's turbulent economy, you need clear, personalized investment guidance more than ever. That's what you get when you become a client of my portfolio management services. When you hire me and my expert staff to manage your investments for you, we employ the same value-investing principles I've followed for my entire career. But hurry, space is limited. Click here to learn more about how you can profit from my portfolio management services.

3. Basing stock market trading decisions solely on past share-price movements: Share prices rise and fall based on a number of factors, including what’s going on in a company, its industry and the world.

A stock never gets so high that it can’t keep rising, nor so low that it can’t keep falling. That’s why you have to look beyond price changes when deciding when to buy or sell.

4. Failing to take a skeptical view of speculative investments: Some investors generally put too high a value on speculative ventures. They want to believe that innovations will succeed, and that they’ll get a fair chance to profit. Their innate politeness stops them from asking tough questions of smooth-talking promoters. Excess optimism plus a data shortage leads them to pay too much.

That’s why we focus our stock market trading on well-established companies rather than start-ups, even in Stock Pickers Digest, our advisory for aggressive investors. Most of our Stock Pickers Digest buys are far better established than your average penny stock.

5. Selling good stocks in anticipation of a market downturn: In times of market pessimism, many investors are tempted to sell all of their stocks, regardless of quality, in hopes of getting back in at lower prices.

However, selling to sidestep a market downturn rarely works out as neatly or as profitably as sellers hope. First, some stocks hold steady or rise during a downturn — these are often the strongest stocks in the subsequent upturn. And sometimes the downturn ends much more quickly than you expected, and you wind up buying back in months or even years later, at much higher prices.

Other times, the market moves up, the seller buys back in, and the real downturn begins. That can leave you down 20% or more on a 10% market downturn.

If you’d like me to personally apply my time-tested approach to your investments, you should consider becoming a client of my Successful Investor Wealth Management service. Click here to learn more.