Here are three common mistakes most investors make when investing in stocks. By avoiding them, you can increase your portfolio’s long-term returns, and significantly cut your risk.
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Owning too many stocks. When you’re first starting out, you should aim to invest in a minimum of four or five stocks — one from each of most, if not all, of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities). But you can buy them one at a time, over a period of months or even years, rather than all at once. After that, you can gradually add new stocks to your portfolio as funds become available, taking care to spread your holdings out as we advise.
When your portfolio gets into the $100,000 to $200,000 range, you should aim for perhaps 15 to 20 stocks. When you get above $200,000 or so, you can gradually increase the number of stocks you hold. When your portfolio reaches the $500,000 to $1 million range, 25 to 30 stocks is a good number to aim for.
Our upper limit for any portfolio is around 40 stocks. Any more than that and even your best choices will have little impact on your personal wealth.
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Paying too much attention to technical analysis when investing in stocks. Many investors find it helpful (or, at least comforting) to employ stock price charts and other tricks of the technical analyst. Unfortunately, it’s all too easy to let technical analysis come to dominate your investment decisions. When that happens, you may sell some stocks just as they begin to plunge, and buy others just as they begin to soar. But over long periods, your results are apt to lag behind the market, because you’ll trade more and sell your best choices way too early. If you use technical analysis at all, you need to recognize it as just one of many tools that can help you make decisions when investing in stocks.
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Failing to be skeptical with junior companies. It’s easy to fall in love with the premise/concept that makes a junior stock attractive, so much so that you ignore dismal financial developments. It happens all the time with gold explorers, cancer-cure stocks, and the many change-the-world technology stocks whose technologies just don’t work.
Buying a profitless solar-power stock, for example, is not an effective way to protect the environment. To help the environment, invest wisely, then donate some profits to environmental causes.
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