Topic: How To Invest

Investor Toolkit: Many investors make these 3 mistakes when they buy stocks

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 steer clear of when you buy 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: “These 3 investment errors can hinder your returns and make you miss out on good investments.”

Two weeks ago, we pointed out three investment mistakes – adopting an unrealistic investment strategy, trusting in new issues and buying too many popular stocks pushed by brokers and the media. (View the post: Avoid these three investment mistakes.)

Of course those are not the only errors investors can make. Today, we discuss three fairly common errors we remind our readers of from time to time. Almost all investors make one or more of these mistakes sooner or later, and they can be costly to correct.

  1. Too little diversification among the 5 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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  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 — these are often the strongest stocks in the subsequent upturn. And sometimes the downturn ends much more quickly than you expected. Then to get back in you may find yourself compelled to buy 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 stocks 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.

For advice on how to spot the best undervalued stocks – and how to avoid those that are overhyped – you can download a free copy of my latest free report. Click here to download your copy of Bargain Stocks: Your Guide to Finding the Best Undervalued Stocks. I’d also encourage you to share the report with a friend.

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