3 Common Mistakes People Make When Investing, and How to Avoid Them
Making money is more fun than losing it! Yet the biggest mistake that a person can make when it comes to investing is failing to even start, and it is the fear of making mistakes that contributes to this number one mistake.
On the other hand, the second biggest mistake are those people who do try and give investing a go, make a single mistake that loses them money early and puts them off from getting back in the market. This is very common but also unfortunate – because those who get cold feet are missing out on a path to a stable and secure financial future.
“Experience is simply the name we give our mistakes.” – Oscar Wilde
Experience is the best teacher, but whilst the most effective way of developing good investing habits is by learning from the school of hard knocks and making your own investment mistakes (the expensive path), the second-best way (less effective but far more pleasant) is by learning from other peoples’ investment mistakes (the smart path).
Making investment mistakes that result in losing everything is understandably the stuff of nightmares, yet knowing just a few golden rules can help you avoid many common investing mistakes, so you can start investing like a pro from day one.
In this Blog we are going to take a deep dive into 3 common mistakes people make when investing, explore how to avoid them and address some of the other mistakes you should be aware of, before you start investing.
- Getting bad advice, or not seeking any advice
The smart investor has to be flexible and willing to change their decisions and approach. You cannot get bogged down by biases, or ego that gets in the way of intelligent investment decisions. Don’t surround yourself with YES people. Look for those that challenge your opinions, and your knowledge. There’s a saying that if you are the smartest person in the room, you are in the wrong room.
Another risk is the danger of over-confidence. “Beginner’s luck” can easily lead you to think that you don’t need advice from others. Such overconfidence is dangerous as it breeds complacency and encourages excessive risk-taking that may result in an investment disaster.
Financial advisory firm, deVere Group, surveyed 752 investors around the globe with assets totalling more than 1 million pounds sterling ($1.83 million) each and discovered that even millionaires make this mistake. When asked to comment on their mistakes, 35% of wealthy investors admitted to not seeking advice, falling prey to their own pride and urge for self-reliance.
The key here is to actively seek out qualified opinions that differ from your own. Success leaves secrets. If you want to avoid making your own mistakes the best lessons in life are leveraging of other people’s experiences. Many famous investors like billionaire Ray Dalio, who founded and is responsible for one of the world’s largest, and most successful hedge funds, are obsessed with searching for dissimilar viewpoints. Once they have found these, the focus becomes to find out what their reasoning is, and by doing this they hope to uncover facts they may not have considered or have been aware of. You aren’t going to learn anything from people who simply agree with you all the time.
“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” J.K. Galbraith
No one understands this better than the Oracle of Omaha Warren Buffett. A man whose name is synonymous with wealth and investing, a true modern icon of success. He is one of the most idolised, revered and imitated investors in the world.
“There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.” – Warren Buffett
Warren Buffet consults regularly with his business partner, Charlie Munger, vice chairman of Berkshire Hathaway, who is famously outspoken. In his 2014 annual report, Buffett recalled that Munger had convinced him to change his investment strategy: “Forget what you know about buying fair businesses at wonderful prices; instead buy wonderful businesses at fair prices”.
The good news is that bad advice can be caught and addressed through your own thorough due diligence. Some of the many questions to ask yourself before committing to a particular investment include:
- How can I lose money with this investment?
- How will this investment help me achieve my personal and portfolio objectives?
- Does this investment pass the business common sense test?
- How realistic is the expected return?
- What’s my exit strategy?
However, whilst bad advice can cause some bad mistakes, allowing emotions like fear, ego, greed and impatience drive your decision-making is setting yourself up for failure.
- Letting FOMO influence your decisions
The Fear Of Missing Out can result in you getting both in and out of the market at the wrong time, costing you money.
It’s normal to feel safer investing in something when your friends and family are doing the same and media is reinforcing the message that it’s the place to be. But “safety in numbers” is often doomed to failure. There are lots of people who can sell if the news turns sour, but no one left to buy. It’s the opposite when everyone is pessimistic and sells as it only takes a bit of good news to turn the value of the investment around. Likewise, it’s easy to become freaked out and concerned about huge wild swings in the market, but now it’s not the time for overreaction.
There will always be booms and busts, as part of the market cycle. But, it turns out that the point of maximum opportunity is when the crowd is pessimistic (or fearful) and the point of maximum risk is when the crowd is euphoric (and greedy).
Understanding this simple truth is massively important. The biggest mistake and threat to creating wealth is not the market, it’s you, and making decisions based upon emotion. Fear is an emotion that can trigger poor decisions. If you are unable to hold your nerve, and panic during a market downturn, then react to this then sell out you cannot recoup on the upside.
The sad truth is that most investors buy the wrong thing at the wrong time just because they think the current market trend will continue for the foreseeable future, As Warren Buffet says: “Investors project out into the future what they have most recently been seeing. That is their unshakeable habit.”
Instead, you should do what the best investors in the world do. They create a simple list of rules to guide them when things get too emotional, stay the course and remain on-target long term.
The expectation has to be there will be booms, and there will be busts. These will certainly have an impact upon our emotions. The challenge is to be rational, and not make irrational decisions.
We have probably all heard the interviews from a sporting team that wins – they talk about trusting the process when times become challenging. It’s the same with investing. You have to have a plan, a set of rules to guide us, and expect that times will become challenging, our emotions will be tested. When they do, we need to stick to the plan, trust the process, and follow it.
- Being impatient
If I was to ask you what do the worlds greatest investors all have in common, how many of you would reply – they love making money?
Well, your answer would be right, and let’s face it, I don’t think I’ve ever met anyone that doesn’t honestly enjoy making money.
But there’s actually one thing that these people are more interested in than making money. The world’s greatest investors are all obsessed with not losing money. That comes first for them. It’s the priority over making money. Most billionaires take only small risks, even when a stock market is soaring upward.
A good example is Sir Richard Branson, the founder of Virgin Group, who oversees more than 400 companies. An inspired entrepreneur and adventurer in life, he believes you need to do everything you can to minimise investment risk while maximising returns. He refers to this as his asymmetric risk/reward philosophy.
A great example is when he launched Virgin Atlantic Airways in 1984 with just five airplanes. He spent an entire year negotiating an agreement with Boeing that would allow him return those planes if, for some reason, the business didn’t go to plan.
Greed and impatience are dangerous traits when it comes to life, and the same with investing. We all have the tendency to want the biggest and best results as fast as possible, rather than focusing on small, incremental changes that compound over time.
Patience is a virtue
Some other investment mistakes you should try to avoid.
- Not diversifying
- Not having clear investment goals and a plan
- Trying to time the market
- Thinking short term
- Not investing in your own financial education.
So, in summary
- Mistakes are common when investing, but some can be easily avoided if you are aware of them.
- Learn from others but do your own due diligence.
- Take emotion out of your investment decisions by sticking to the fundamentals and having a long-term financial plan that allows for your goals and risk tolerance.
Other recent blogs you might be interested in:
- The most important investment decision you will make.
- How to reach your goals faster.
- What’s a financial plan, and why do you need one?
What’s the biggest investment blunder you have made?
Note: The information in this article is general in nature as it has been prepared without taking account of your objectives, financial situation or needs.Get Your Free Credit and Debt Assessment Now
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