You’re at a party, and after a few drinks your friend lets it slip they’ve “actually just invested in TechHub Ltd, apparently one of the hottest tech startups in Australia at the moment.” “Oh right!” you say, this being one of the first times you’ve heard your friend talk about investing. “What does it do?”
“Oh, you know, something to do with facilitating other startups, I’m not too sure, I got a tip from a colleague at work, BUT the market is dropping so we’re catching it before it bounces again, AND I’m going all in because imagine the returns if I double my money within 2 months, and wait for it, the best thing…it’s only 7c per share, how cheap is that?!”
It’s at this point you realise your poor friend (potentially soon to be poorer), has committed several common investing mistakes, which we outline below. They’ve invested in something they don’t know about, they’ve tried to time the market and have let their emotion get in the way of their logic. Being aware of the following mistakes could save you emotional energy and financial pain down the track.
- Investing in Companies You Have No Idea About
Arguably the world’s best investor, Warren Buffett, says you shouldn’t invest in companies that you do not understand. If you do not understand their business model, their product or services, or their customers, then stay away. If you want to be in the market but don’t have the time to sit down and get your head around individual companies (and trust us, it takes a lot of time!) then the best approach should be to look at exchange-traded funds (ETFs) – they offer reduced-risk exposure to a broad range of companies. Their managers do the work, so you don’t have to.
- Letting Your Emotions, Not Your Brains, Get In The Way
Emotions are a dangerous thing in the world of investing, so try to ignore them where possible. Despite fear and greed ruling the market, they can kill your returns if they rule you. The key to seperating yourself from your emotions is to look at the big picture. Short-term you may suffer, and it’ll hurt to look at your stocks slide, but markets always recover. Remain focused on your long-term goal, don’t log into your trading account when you know there’s a downward trend – it’ll only compound your feelings of loss! Think with your head, not with your heart.
3. Letting Your Emotions, Not Your Brains, Get In The Way
Slow and steady wins the race. Have you heard that before? We’re sure you have and there’s a reason for it – because it work! Be it at the gym, your career, or building a share portfolio, the best results come after time. A disciplined, steady and patient approach will go a lot further than chasing the 100x bagger in 2 months. Investing is a long-term game. Portfolios are designed to grow over time. Having a punt is for the short-term payoff and a recipe for disaster. Keep your expectations realistic in terms of growth and time and you will most-likely be rewarded.
- Too Much Churn
This flows out of being patient. Try not to trade your stocks excessively – the more you trade the more you will pay. Brokerage fees are getting cheaper, but they can still hurt you over time, if you’re constantly trading in and out of stocks. Don’t forget the tax as well! You’ll pay capital gains tax on any profits you make, and if those profits aren’t much then perhaps it’s best to keep ownership rather than sell.
- Trying To Time The Market
It’s about time IN the market, not timing the market. Trying to time the market is no doubt going to kill some of your returns. Don’t try to catch the falling knife. You’ll rarely be able to pick when a market bottoms, and you’ll rarely be able to pick when it’s at the top. Not even the best professional investors can achieve this! It’s important to remember – most of the returns your portfolio will make will come from your research, investment decision and strategy, not from trying to time the market.
- Falling in Love with a Company
It’s easy to fall in love with a company when it does well. You feel great, you picked a winning stock! But never forget that you bought it to make yourself some money. Keep an eye on the fundamentals that made you buy it in the first place, and if they change, think about breaking-up! It’s tough, we know. But it’s better to dump the stock, than for it to dump you.
- Pride- Waiting To Get Even
Don’t let your pride get in the way. If you chose a stock and it’s losing, don’t avoid selling it because you want to wait for it to recover. This is a cognitive error. Firstly, you are not selling a losing stock and there’s no guarantee that it won’t keep falling, and secondly it’s opportunity cost – the money could be better used in another investment.