7 Common Investing Mistakes You Must Avoid (Part 1 of 3)

Investing is a complicated process to tackle and it is of no surprise that rookie investors may stumble in the beginning. Making mistakes is part of the learning process, however, some of these mistakes can be costly when investing. Through this article, we will cover the 7 common mistakes that investors tend to make to help you avoid them and make better investing decisions.

1. Failure to set realistic investment goals and expectations

Many beginner investors expect to earn very high returns within a short time frame or have totally zero risk tolerance. They expect that once they buy the stock, the market will only move in an upward direction. When they see that the stocks are not making money as what they are expecting, they panic and sell off the stocks immediately. This often results in making losses.

However, it is not impossible to make good gains within a short time frame. But more often than not, someone who invests in a consistent manner within a reasonable risk level profits better than those who invest a big sum of money inconsistently. Experienced traders who understand risk return ratio and technical analysis will have a slight edge in their trades. Therefore, by the law of large numbers, it is definitely possible to see an overall gain consistently.

When we talk about investing, there is certainly nothing speculative in nature in the very short term. While it is a bonus that we can do well in the short term, it is something we are less concerned about.

So how is this an issue?

Beginner investors often pin their expectations on the short-term returns and fail to realize that the stock market can be volatile. We always say that the stock market in the short term is a voting machine and in the long term, a weighing machine. Prices do not accurately reflect its worth when sentiments turn bearish. But if you were to buy the stock of a fundamentally good company, the stock price should rally up over time. Just be mindful that the stock price does not go up every single day.

At the end of the day, make sure you have given due consideration to your investment goals, expectations and risk tolerance. Set realistic goals on how long you expect to hold this investment and the expected returns. Know your risk tolerance and how much paper losses you can tolerate. If you are unable to tolerate high fluctuations in prices, should you then relook at the type of stocks that you are intending to invest in? A better approach could be to start with investing in ETFs as ETFs are generally less volatile as compared to individual stocks.

2. Making investment decisions based on emotions

This is easily the top mistake that many new investors make! Some investors make rash and irrational decisions by buying on greed when they see the stock prices increase or they experience FOMO (Fear Of Missing Out) and buy when they see their friends buying. Very often, they chase after the prices and end up buying at overly high prices. They may also panic-sell when they see prices falling and their peers selling off the positions. The investors fall into a situation of “buying high and selling low”, thus making losses. In fact, many retail investors – not just new investors, are still guilty of buying and selling stocks based on emotions.

Take for example the SPY ETF. If you had entered a position of SPY at US$140 just right before the prices declined by 50% in the 2008 recession, you would have profited by 140% by now, giving approximately 10% annualised return.

Let’s look at a more recent example. If you already hold a position of SPY before the start of 2020 and were disciplined enough not to fall to the traps of panic-selling, you would still be up by about 14% return for 2020!

Now, you can do the comparison yourself. What would it be like if you had instead sold off the position when the prices fell drastically during 2020? Thus, if you are disciplined enough not to let emotions overpower you to make impulsive choices, you will actually perform much better than many of the retail investors out there driven by emotions.

Ample homework and research should be done to identify the fundamentally good stocks and enter the market at a good price. Even if it is unfortunate that the stock prices fall the moment you entered the market, we should not fall to the traps of panic-selling as these prices are expected to go up in the longer term. Do not let your emotions overpower you and make rash decisions that you will regret later.

3. Investing based on news or analysts’ opinions

This brings us to the next point on doing research for our investments. We often hear people say “do your research before investing”. But what kind of research are we supposed to do? What kind of information are we supposed to look out for?

Reading news media articles and following the news blindly is not what we consider as doing proper research. Performing proper research on the stock involves understanding the business of the company, the financial performance of the company as well as many other factors such as sustainability of the business. For example, if we are analysing the performance of REITS, we would do better by reading on the statistics of the trend for occupancy rates or the trend for the price per square feet rather than relying solely on news report articles or the opinions on the investing forums.

Many of you might be thinking – so are you saying that we should not read the news or the views of other investors?

Reading the news to keep yourself updated with the current affairs of the company is very useful. It is also always good to read up more on how other investors think and act. Gaining a new perspective will ensure you don’t neglect any critical factors you may have not noticed initially. But you should keep an open mind on what you read and form your own opinion instead of following blindly so that you can make a more informed decision when investing.

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Stay tune for Part 2 of the article!

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