These bad investment decisions can lead to big losses, so here’s how to make your decisions wisely.

Most investor sayings and clichés have at least a hint of truth. But they can still lead you to make good or bad investment decisions, depending on how you apply them.

For instance, you’ll sometimes hear investors say that you shouldn’t fall in love with your stocks. This seems to make sense. You should keep an open mind on your investments, rather than falling in love with them and holding them forever, despite any adverse changes in their business or the field in which they operate. However, investors sometimes use this tidbit of advice as a justification for selling a stock that has shot up unexpectedly.

1. Bad investment decisions: Trusting broker jargon constantly

From time to time your broker may advise you to sell a particular stock you own because it represents “dead money.” This doesn’t mean there’s anything wrong with the stock or the company. Instead, your broker simply thinks the stock may only go sideways for a period of months or longer, producing no capital gains for you. So the broker naturally feels you should sell it and buy something with better short-term capital-gains potential.

To do so, of course, you have to pay one commission to sell and another to buy. You may also face some costs from the bid-ask spread. If you make money on the sale and the stock is outside your RRSP or other registered account, you’ll also have to pay capital-gains taxes. And that leave you with less capital to reinvest.

Taking all that into account, putting up with a little “dead money” in your portfolio doesn’t seem to be quite such a bad idea.

Besides, many stocks qualify as “dead money” much of the time. That’s because they go sideways over long periods; their biggest gains occur in unpredictable spurts. Risk is relatively low in a high-quality stock that is going through a “dead-money” phase, by the way. But profits can be spectacular when it comes back to life.

2. Bad investment decisions: Selling stocks too soon

It’s easy to jump to the conclusion that unexpected strength in a stock won’t last. Friends, brokers and cable-TV commentators may advise you to “take some money off the table” —that is, sell all or part of your market-beating stock pick. They may justify this advice by informing you that “you never go broke taking a profit”, and that you can always “buy it back on a dip”.

In fact, unexpected strength in a stock you have reason to like is a terrible reason to sell. The stock may be stronger than you expected because you underestimated the growth potential or competitive advantages that made you like it in the first place.

Experienced investors can tell you that some of their best stock picks started going up out of proportion to what they expected, and kept out-performing for years. By the time the first significant “dip” or setback comes along in a stock like this, it may have tripled.

Remember, no one can predict which stocks will be average performers, which will be losers, and which ones will turn into the superstocks that wind up rising five-fold, 10-fold or more. You may avoid some temporary losses if you sell every stock you own that goes up faster than you guessed. But do that, and you will also sell any superstocks you happen upon, often when they are just getting started. However, you need a few superstocks during your investing career, to make up for the inevitable losses.

3. Bad investment decisions: Holding stocks too long

Deciding when to sell is the trickiest part of investing. We are programmed to run from danger, and every day the media brings new reasons to sell.

You can find numerous rules of thumb that aim to tell you when to sell. Most are based on chart-reading or technical analysis. All work at times, but none work consistently. When they fail, the profits you miss out on are likely to overwhelm any risk they help you avoid.

Our rule is that you can cut down the number of times when you really need to sell by consistently buying well-established, high-quality stocks. These stocks can still drop sharply when the economy falters or bad news strikes, of course. But these are the stocks that snap back quickest and most reliably when the trend reverses and bad news comes less often. That’s why it generally pays to hold on to stocks like these through market setbacks. But you need to look at each case on its own, since there are exceptions.

How do you avoid bad investment decisions? Did you learn this lesson through experience?

We’ve all made bad investment decisions. What is the worst one you’ve made?