The 8 Worst Investment Mistakes Everyone Makes
Once you learn how to identify the common traps and misconceptions about investing, you will start making sound financial decisions.
The first thought I have when I meet any new client is, ‘How can I make the biggest, most positive financial impact for this person, as quickly as possible?’.
For many people, the best starting point is being able to identify the most significant investment mistakes they are making and putting a stop to that behaviour. And you don’t even need me for that!
Once you learn how to identify the common traps and misconceptions I’ve covered below, you will start making sound financial decisions.
1. Believing you can get better returns than the market.
Many people think they can get better returns by picking stocks rather than going for an index. And I get that. The argument might go something like this, “If I just ignore the worst stock, or better yet, just put my money on the ‘best’ stocks, then surely I will be better than the average”.
This is a widespread belief. It’s common on Wall Street, and it’s common on main street. But it’s rarely the case.
Professional money managers make it their mission to beat the index. Do they beat it? Almost never.
They certainly don’t beat it in the long term.
My advice? Don’t think that you are the exception and that you can get better returns than the market.
Do your research. Meet with a money manager and learn how to assess the index trackers of the S&P or ASX 200.
2. Believing that the latest fad will take over the world.
Some of the best advice I have ever received came from a friend who is a particularly good money manager:
“Sometimes you can have a great company, and they can have the best product and the very best management team, but it just doesn’t work. The product doesn’t gain traction. For whatever reason, the timing is out.”
I hear people raving about why this new product or innovation is going to overtake the world. The reality is it probably won’t.
You have to remember that we live in a fast-paced world where technology not only ages quickly but often gets killed by innovation.
Just look at all the products smartphones have replaced.
Digital cameras, video recorders, Dictaphones, mp3 players, notepads, diaries, and calendars. Unless you are a photographer or have an interest in cameras, how likely are you to buy a digital camera?
Don’t get too carried away with the newest sparkly toy. It’s challenging to know what is going to last and what is going to fizzle out. Often, it’s not even the best product that wins.
Remember, companies that have been around for a long time tend to stay around a long time.
In turn, companies that have only been operating for a short time are more likely to disappear as quickly as they arrived.
Most importantly, invest in what you know.
The great thing about investing is that you don’t have to invest in everything.
Review your portfolio and look at how much of your hard-earned money is invested with trusted, long-running companies selling products that you understand, and you know people use.
Then look at which companies in your portfolio are brand new and selling new technology. It makes sense to have more of the former and less of the latter. Warren Buffett would agree.
3. Listening to media.
If you are going to listen to the media, you need to understand how the media works.
People who work in the media and those who are seeking media coverage want one thing: to be noticed. The coverage they generate, the click-throughs to the websites, and the increased engagement their actions receive on social media are their measures of success. They are looking to convert sales and crack algorithms.
Making a big, headline-grabbing prediction is often what gets attention rather than an accurate prediction.
At the end of the day, the media has no skin in the game.
It is easy for a person to broadcast something and then walk away without repercussions. For them, there is no downside and no loss.
Always ask for a second opinion. If the headline sounds too good to be true, find a local trader who has a reputation for managing portfolios that perform well and ask for their assessment. Or shoot me an email here; I’ll let you know exactly where you stand.
4. Sticking with a bad position.
Do you ever think ‘I don’t want to know how much I’ve lost’, or, ‘If I sell now I will have made a loss’?
Well, I have news for you.
If your investment is already failing, that loss is already made.
Ask yourself these two questions:
- Am I still happy with this investment?
- Will this investment get better returns than any other investment I can buy right now?
If you answered no to either of those questions — and especially if you answered no to both — you should think very closely about selling and moving on to the better option.
5. Not having a plan.
Everyone needs a plan. If you don’t have one, developing a plan should be the first thing on your plan!
Better yet, build a mission.
Have a clear view of where you want to be financially in 10, 20, 30 years and work towards that goal.
6. Aiming for a quick win
Investors stay for the longer term. If you have a short time frame for investing, you are probably not an investor. You are probably a speculator or trader.
Read my blog “What kind of investor are you?” to understand the difference.
7. Ignoring the fees of your money manager
While it is tempting to ignore them, fees can add up.
Could you be your own money manager? What’s stopping you?
In the long term, you could end up buying yourself a Porsche rather than waving to your money manager in the sports car he bought with your fees.
8. Not starting early enough
Does it make sense to wait until you are lean and super fit to join the gym? No. Then it doesn’t make sense to wait until you are wealthy to invest!
Investing over the long term is what will make you wealthy.
My smallest investor (and my youngest client) is my 8-year old son. He has an investment portfolio of $200. No, that’s not a typo. Starting small is the key.
To get an understanding of how this works, say you placed $1,000 a year for 46 years in an investment with S&P returns (at roughly 13%). After 46 years, you would have returns of slightly over $2.4 million.
- The key is to build a diverse investment portfolio that includes a combination of stocks from across the economy.
- Avoid putting all your money on a single stock or couple of stocks. Putting all your eggs in one basket is the opposite of diversification; it is too risky for a long-term investment strategy.
- Invest in what you know.
- Place your investments with trusted, long-running companies.
- Don’t stay with investments you aren’t happy with.
- Set financial goals for the decades ahead.
- Starting now is better than starting later.
- Be patient!
Want more info on improving your investment strategies? Read my last article.