Avoiding these mistakes will help you invest money in stocks more successfully
Almost all investors make one or more of these mistakes sooner or later as they invest money in stocks. Unfortunately, these mistakes can be costly to correct:
1. Too little diversification among the five sectors: Manufacturing and Resource stocks involve extra risk, Canadian Finance and Utilities involve lower risk, and the Consumer sector falls somewhere in between. Sectors go in and out of investor favour, depending on economic conditions, corporate earnings, and investor whim. But in the long run, winners and losers will appear in all five.
If you stick to one or two sectors when you buy stocks, you may get lucky and all of your picks will be successful ones. But all your stocks could wind up out of favour and depressed. If you have to sell, you’ll do so at a low. So, spread your money out to eliminate luck. That way, you’ll always have exposure to the year’s most profitable investments, a key to successful investing.
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2. 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 avoid a market downturn rarely works out as neatly or as profitably as sellers hope. Some stocks hold steady or go up during a downturn and sometimes the downturn ends much more quickly than you expected.
3. Failing to consider conflicts of interest: Financial incentives have an enormous impact on the beliefs of otherwise honest people: That’s particularly true when it comes to what they are willing to say in order to spur you to buy something.
Failing to spot these conflicts of interest before you buy stocks can be very damaging to your investments.
4. An unrealistic investment strategy: Some investors, especially newcomers, believe they can buy a few hot stocks (or options or futures), and double or triple their money in a few years.
5. Investing in structured gold investments: Brokers sell various structured products for investing in gold and other commodities, while supposedly limiting risk. Most participants will ultimately lose money in these investments, as well. Or they will make a poor return in relation to their risk.
The difference between structured products and even riskier gold futures trades is that the losses won’t happen so quickly. However, more of the money you lose will flow into brokers’ fees and commissions, while you’ll typically lose less on the commodity investments themselves.
6. 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.
7. Investing in low-quality Canadian penny stocks: When the bubble bursts, prices of low-quality stocks inevitably come crashing down. After all, it’s much easier to launch a stock promotion than it is to create a successful, lasting business. Penny stocks tend to be more speculative, and are engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology or launching new software.
8. The longer you invest in penny stocks, the likelier you are to lose: You can get lucky in penny stocks, just as in lotteries. But if you play long enough, the “house odds” eventually triumph over any run of luck. In penny stocks or games of chance, the odds are against you. The longer or more often you play, the likelier you are to lose.
9. Buying too many “stocks that everybody likes”: When building your stock portfolio, it’s crucial to follow our advice on downplaying stocks that seem to be near-universally recommended by brokers and are getting a lot of favourable media coverage.
Some stocks like these remain popular for years, if not decades. They can be profitable during those periods. But if you invest too much of your portfolio in stocks like these, you’ll often buy in just as they reach their peak.
Our investment advice is that you should take the approach that will work for you 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.
Have you made any of these mistakes while investing money in stocks? Share your experience in the comments below.
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