03 Feb 2021
What do you think are the most common mistakes that you see beginner investors do and what would you like to advise them if you could?
I'm new to investing so I feel that if I can avoid mistakes by learning for seasoned investors, then wouldn't that be great? Haha. Cheers!
I find it helpful to categorize mistakes into three categories:
1) Mistakes that are the result of not knowing enough
2) Behavioral errors
3) “Mistakes” due to events/situations which would have been hard predict (e.g. acts of god or black swan events)
Example of a mistake in the first category. You buy into a particular REIT seeing as everyone is talking about it. Alas, because the REIT’s gearing ratio is close to the MAS regulated gearing limit, the REIT takes advantage of its currently high unit price to conduct a large rights issue. The rights issue happens at a steep discount to the last traded price and the REIT’s unit price tumbles. This may be the result of not knowing enough about REITs in general, and perhaps not following this particular REIT closely enough. To minimize such mistakes, our advice is to learn actively on your own as well as from more experienced investors.
For examples of behavioural errors, see this article: Behavioral Finance - Overview, Examples and Guide (corporatefinanceinstitute.com)
Example of a mistake in the third category. You own stocks in a manufacturing company. A natural disaster occurs and the company’s factories are decimated. The stock tanks.
A word of caution is that many investors have a tendency to attribute the bulk of their mistakes to this third category. By doing so, they relinquish any responsibility over the bad investing decision.
While there’ll always be things that happen that we couldn’t have predicted, it’s important to have an attitude that you could have done more research or been better prepared. In additional, it is also possible to minimize such company-specific risks if you have a sufficiently diversified portfolio as negative shocks from one stock tends to be offset by positive surprises from another stock within the portfolio over time.
In terms of advice for beginner investors, it’s important for you to decide what sort of investor you are.
Are you a casual investor who just wants a decent return? If so, go for a portfolio that is well-diversified. Use ETFs or mutual funds to get exposure (see our discussion: When to use Active Mutual Funds vs Passive ETFs - The InvestQuest). “Time spent in the market” is much more important than “timing the bottom of the market” (see “Step 3” of our article: For Our Singaporean Readers, 3 Ways To Level Up Your Investments - The InvestQuest)
Or are you planning to devote a lot of time and effort into constructing your portfolio? If you’re very interested in investing, read up lots (books, research reports, annual reports, fund newsletters). Try modelling a few companies on excel. Talk to enthusiastic individuals who will share their perspectives with you.
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