5 Investing Mistakes That Are Easy to Make
I hate making investing mistakes. I suppose it’s because I hate losing money by doing something foolish. I spoke to retail investors everyday for five years and know I’m not alone. In many instances the investing mistake was due to lack of knowledge, but often times they made no sense at all. They were trying to outsmart the market and by doing so they lost a lot of money. I say this not to judge, as I’ve made plenty of investing mistakes over the years.
If you’re a stock market veteran or just learning to invest take a look at these common investing mistakes and how to avoid them in the future.
We All Make Investing Mistakes
This is the most important thing to remember. Despite well laid plans all of us make mistakes. I know that I have been guilty of making them myself, especially mistakes when investing in the stock market. About four years 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 at Scottrade as she wanted some shares after they hit the market.
This is not to throw her under the bus, but there were things that did not sit right with me about Groupon. They came out priced at $28 per share and I bought some shares right near the IPO price. Unfortunately, the shares sank like a rock after it began trading. We held the stock for a few months and were able to sell at $24 per share. It wasn’t a huge loss, but one I was not happy making.
Where is Groupon today? Well, they’re in the $3 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.
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Using the Wrong Type of Order
There are two major order types when you want to buy or sell 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 use when you start 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 buying or selling the stock you want, but you get it 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
Many people like to login to their brokerage account multiple times each day. That can pose a problem if you’re prone to make an emotion based decision. The opposite problem is never checking in on your portfolio. The latter is 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 hope 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.
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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 responsibility.
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.
If you need help doing this with an old 401(k) in particular, you can use a free service like FeeX. They analyze the funds available in your 401(k) plan and help you choose the best funds based on fees. They also send you quarterly updates if there are opportunities to make improvements. Sign up through this link to see how you might be able to lower your fees.
That being said, one thing I advised retail investors to do was take a small amount and invest it on your own so you can have a better grasp of the stock market. You can simply do this through a online brokerage, like Motif Investing, where you can start investing with as little as $250. I use them myself and they provide a great way to start investing with little money help diversify your investments.
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
The stock market has its ups and downs, thus why it’s so important to separate your emotions so you can avoid making any mistakes with your investing. A clearly defined investment plan is be your best friend during times of market upheaval. Part of my investment plan is to set a stop loss order so I can get out of a stock once it loses 25 percent, no matter what.
This means once a stock I have bought goes that low I will sell it. 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 years, 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 make a significant dent in your 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?