Topic: How To Invest

Investor Toolkit: 3 costly mistakes many investors make

Building Money

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on investments, including errors to avoid when you are buying stocks. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “If you can avoid these 3 common investor errors, you significantly improve your chances of achieving positive returns.”

We have found that one of the best ways to improve long-term performance is to avoid losses—win by not losing, you might say. Today, we look at three fairly common errors; almost all investors make one or more of these mistakes sooner or later, and each of them can be costly.

  1. Too little diversification among the 5 economic 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, 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 when prices are low. So, spread your money out to eliminate luck. That way, you’ll always have exposure to the year’s most profitable investments, one of the keys to successful investing.


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  1. 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. First, some stocks hold steady or go up during a downturn—and these are often the strongest stocks in the subsequent upturn. Sometimes the downturn ends much more quickly than you expected. To get back in you may find yourself buying stocks months or even years later, at much higher prices.

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

  2. 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 can be very damaging to your investments. We’re not just talking about stock brokers. As the saying goes, never depend on your barber to tell you that it’s too soon for you to get your hair cut.

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

What is the most costly mistake you have made as an investor? How long did it take you to recover from it? Did it make you a better investor? Let me know what you think.

Comments

  • It was low 6 figure loan, non secured, to a private small cap at 18% being repaid interest only 1/4ly when the economy slowed in 09. I feared for a loss , so I recommended to the debtor a rate of 10% with continued payments at a rate 18%. The loan is being repaid as initially structured & yes 10% is a great rate in this economy but if I would not have panicked the original loan would still be o/s & I would have had several thousand more $ invested in the market.

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