If you’ve made a mistake while trading, congratulations. You’ve passed the Turing Test, or to put it another way: you’re human.
There’s a reason why monkeys can be as effective (if not more effective) than hedge fund managers when it comes to picking stocks and a reason why robo-advice is becoming big business: humans are fallible.
It’s what makes being a human so exciting, but our tendency to pile into the irrational can also have a negative impact on our portfolios.
It’s why having a professional investment advisor makes so much sense – but even they can make mistakes.
To help you understand, we’ve compiled some ideas (not advice) around some of the common mistakes investors make when money is at play and emotions get involved.
The top 10 mistakes investors make
1. They forget that they’re investors
People tend to forget about the difference between being an investor and being a speculator.
Being a speculator basically involves looking at a bunch of charts and trying to call share price pops or dives, but being an investor is something different.
Being an investor means you’ve researched the company you want to invest in, you’ve researched the sector its in, and you believe in its longer-term fundamentals.
While closing your position if shares are going into a freefall is in most cases the smart move, an investor can see the forest from the trees and can keep their heads when all around people are losing theirs.
2. They invest in things they don’t understand
A typical trader may come to a company simply because they’ve been told by a mate in the bar that they’re a good company to be invested in.
While Robbo may be on the mark, it’s shouldn’t detract from the importance that investors do a deep dive of research into the sector, the company, and the broader thematics at play with each investment.
Afterall, if you don’t really understand what a company does — why would invest in it?
Luckily, Star Investing has great background on some of the smaller players in the market that don’t get a huge amount of mainstream attention.
3. They hold onto dogs, figuring it will *have* to turn around
While there’s benefit in being a loyal investor, there comes a time where you have to close a position — if only to crystallise a loss.
Yet, many investors will go down with the ship out of blind loyalty or the belief that what goes down must come up.
Nope, sometimes shares just go down and companies get wound up.
Remember, following a company because you’re invested in it isn’t the same as following a football team — nobody’s going to blame you if you jump off during dire straits.
4. They don’t have stop loss orders sorted
Unless you’re a very active day trader, it can be hard to get your head around the pace of a drop on bad news.
By the time institutional investors and day traders have sold their stock and the news reaches you, it can already be too late to get out without making a loss on your initial investment.
The savvy investor, however, will have a stop loss order associated with their account and will automatically sell out should the price get too low to avoid such a situation occurring.
5. By the time an investment theme reaches the paper, it’s too late
This isn’t a dig at financial journalists, but by the time an investment theme hits the newspaper it’s usually too late to buy in at the ground floor.
For example, by the time the newspapers got their head around the rise of the bitcoin price in 2017 and started reporting on it, seasoned investors already had a little bit of coin in their wallets.
While news coverage partially fuelled a run, by the time it reached the paper it was too late to buy in at the floor and enjoy the full effect of the rise.
Luckily, there are a swathe of sites which now pour into investing niches (like this one!) which are looking at their patches much more closely than general financial journalists reasonably can — so can be quicker to spot trends and report on them.
6. They forget about tax
An oldie, but a goodie.
Humans can get very excited by the numbers moving on a screen and start to do calculations on how much they could bag if they sold out of their position now.
Unfortunately, in very few circumstances will these calculations involve things like Capital Gains Tax which have the potential to give your profit margin a not-insignificant haircut.
7. Buying on greed, selling on fear
Be like Warren Buffett:
“Fearful when others are greedy and greedy when others are fearful”
Greed and fear are inherently human emotions, and contribute heavily to a bull or bear market — and it’s easy to go with the flow, especially if your money is involved.
But if you’re an investor and not just a speculator (see point 1) there’s an opportunity to make a profit in either direction — it’s about sitting back, looking at the forest, and making an educated decision about the direction of market.
8. ‘Event ceci n’est pas une trend?’
Sometimes, it can be hard to see whether an event unfolding is just an event or part of a longer-term trend.
For example, does Facebook appearing in front of a congressional hearing a one-time thing or is it part of a wider narrative of regulators cracking down?
Is the decision to stop Australian coal imports into Dalian a short-term blip, or does it signal an effect of a possible trade war between the US and China?
How much context you want to apply to any given event comes back to whether you’re a cautious investor or willing to ride it out.
9. They don’t have a trading plan
The market, particularly at the smaller end, is full of ad-hoc traders.
These are traders who dip in an out of market with no clear aim beyond making money. That’s a good goal to have, but without a plan on what exactly you want you’re missing out on opportunity.
Having a plan on what sectors you want to invest in, how much you want to invest in a given time, and what sort of return you’re looking for helps take some of the emotion out of investing.
That’s another reason why having an investment professional by your side is a great idea (again, we can’t stress this enough, this article is not intended as investment advice).
10. They lack diversity
Diversity — it’s a great idea for boards and it’s a great idea for your portfolio.
While it may seem simple, too many investors are comfortable investing in one sector only.
Then, if the gold price takes a tumble, you’re in a better position than you would be if you piled all your cash into gold.
All in all, it’s easy to make mistakes while investing — and there’s no shame in making mistakes, it’s what makes you human.
But, hopefully this list has given you an idea of some of the more common mistakes people make while investing to help you avoid them.
This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
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