Let’s face it, we’re all human. We all make mistakes, some of them can be costly and some not so costly. The ones I hate the most are investing mistakes. In a previous life I worked with retail investors on a daily basis and witnessed firsthand (often with disbelief) some real doozies of investing mistakes, which would always make me scratch my head and wonder what the person was thinking. My favorites were always the ones who knew they were guilty of doing something completely senseless, yet would continue to throw good money after bad and continue to losing money in the stock market.
We All Make Investing Mistakes
Despite well laid plans even the best of us make mistakes. I know that I have been guilty of making them myself, especially mistakes when investing in the stock market. About 18 months ago I made a doozy of a mistake, which I thankfully was able to get out of quick enough. We all know who Groupon is, many of us have probably bought one in the past. Against my better judgment I bought some shares once it hit the market for Mrs. Frugal Rules’ retirement account as she wanted some shares. This is not to throw her under the bus, but there were things that did not sit right with me as they were coming to market. They came out priced at $28 per share and I bought some shares right near the IPO price. The problem is that it started sinking like a rock soon after because the suspicions were true. After holding the stock for several months I was able to get out at $24 per share, but was still mad I had lost the money. Where is Groupon today? Well, they’re in the $5 range and I could not be happier that I was able to get out of the stock when I did. In fact, I feel ridiculous for even admitting that I bought the shares.
Using the Wrong Type of Order
There are two major order types when you’re looking to place an order to buy a stock: Market Order and Limit Order. There are other order types, but these are the most common and should generally be what you’ll want to look at if you’ve just started investing in the stock market. Think of a market order as going to the store to buy an item and you do not care about the price; you just want it right away. By using a market order, your order goes to the stock market right away to seek execution. The limit order, on the other hand, is like going to the store and wanting to pay only a specific price for the item in question. While the market order may get you one of the stocks you want, you have no guarantee on the price. Using the limit order might not guarantee getting or selling the stock you want, but you get execution at or near the price you want. This may not seem like much of a problem, but it is one of the easiest investing mistakes to make. I’ve had numerous times where I tried to buy a stock and ended up paying a bit more for it because I used a market order and was not around to watch it throughout the day.
Logging into Your Account Once a Year
I’ve written before about not checking up on your investment account constantly, but you certainly don’t want to go on the other end of the spectrum by never checking in on it. This is also one of the easiest investing mistakes to avoid and one that can be quite costly if left alone. I regularly spoke with investors who would only log in to their accounts twice a year…right before the end of the year and right at the end of tax season. The problem with this buy and click mentality is two-fold: first it leaves way too much to chance and second, it leaves no time to properly plan for things. One way I suggest to avoid this investing mistake is to log into your investment account at least once a month or once a quarter. This will allow you to see how your stocks are doing as well as clean anything up that might need your attention.
Letting Others Make Your Decisions For You
I know some have turned their investments in the stock market over to a financial advisor. That’s great and many of them can be very helpful in guiding you through making investing decisions. However, this does not release you from culpability. Make sure you check up on your investments on a regular basis so you can be informed as to how they’re performing. If they’re not at the level you’re wanting or are finding fees to be too high then talk to your advisor about it. Part of their job is to make sure that you are in something that fits your needs as well as helping you understand what your investments are doing. One thing I also advised retail investors to do was possibly take a small amount and invest it on your own so you can have a better grasp of the stock market. On a related side note, one of the investing mistakes that is always frustrating to see is investors basing their decisions off of what the “experts” say on CNBC. I am sure some of those individuals truly know their stuff, but please don’t base decisions off of what Jim Cramer might think is best.
Hoping that Your Stock Will Bounce Back
Investing in the stock market certainly has its ups and downs, thus why it’s so important to separate your emotions so you can avoid additional investing mistakes. This is where having a clearly defined investment plan can be your best friend. Part of my investment plan is to set a stop loss order so I can get out of a stock once it loses 25%, no matter what. This means that once a stock I have bought reaches that level it goes to the market to be sold. This helps me avoid holding on to a stock hoping that it’ll bounce back. As someone who has been in the investing industry for some time now, let me share a little secret with you…rarely will a stock bounce back in order for you to recap your loss of principal. I understand the desire to do this, but it is one of the most common investing mistakes that retail investors make and it can really make a dent in your overall portfolio. I’ve done it myself too many times to count and I have vowed to not let it happen again, which is why my investment plan can help with that. The same can be said of also not being too greedy with an investment. If a stock has seen solid gains and you’re happy with them don’t wait around for it to start to slip significantly. I’d much rather have all of my gain as opposed to losing half or more because I was greedy.
What investing mistakes have you made in the past? What do you do in order to avoid repeating those mistakes?
Photo courtesy of: Bergenvolunteers