Stock market strategy: 5 classic profit-killing mistakes

Markets have risen considerably since their March lows. In light of this, investors who sold at the bottom have missed out on the 40% or so that the TSX has gained since then. They now no doubt feel that they’ve made a grave investment error. Successful investors avoid market predictions as part of their stock market strategy. Instead, they stick with well-established, mostly dividend-paying stocks, like those we include among the safety-conscious investments we cover in our Canadian Wealth Advisor newsletter. Regardless of their investment approach, all investors can improve their long-term results by understanding and avoiding these common investment mistakes. 1) Failing to consider brokers’ conflicts of interest. Depending on the investments your broker sells you, his or her income can vary by a factor of two to one to as much as 10 to one. It is important to be aware of how this influences your broker’s advice. 2) Overindulging in speculative investments. Even the best speculatives go through wider price fluctuations and expose you to greater risk than the well-established stocks that we focus on. If you hold too many speculative stocks, you run a far greater risk of loss during a market downturn. [ofie_ad] 3) Confusing “story” with “value.” A great story is no guarantee of a great investment. Last year, for instance, investors paid exceptionally high prices for agricultural stocks, in the belief that farm prices would keep rising indefinitely due to expanding food budgets in China, India and other newly industrializing countries. But the overlooked part of the story was that farm price strength was partly due to government subsidies for ethanol. In any event, high grain prices inevitably spur much more intensive cultivation, and this alone helps moderate prices by bringing supply more in line with demand. 4) Failing to diversify. Many investors’ stock market strategy now includes overloading their portfolios with oil and mining stocks because these companies will benefit from an economic rebound. However, the resources sector has always been and will remain highly cyclical. When the inevitable downturns arrive, they will come as a costly surprise to many investors. 5) Jumping to conclusions. Stock price movements reflect a wide variety of economic, political and other influences, some obvious and others hidden. That’s why we think it’s a poor stock market strategy to zero in on one or a handful of indicators as a guide to what you should do with your portfolio. Just remember that if you look out a window onto a field, you can see why people used to think the earth was flat.