Below are the most common mistakes an investor can make when investing. No one is immune to making mistakes, not even an expert investor, as none other than Warren Buffett admitted not long ago.
We’re going to focus on the mistakes a beginner investor tends to make, and the first of them is, without a doubt, not understanding the type of stock or investment vehicle where they’re placing their capital “bet”.
1. Not understanding the investment product
Many new investors are jumping into the stock market because they’ve heard it was 30% more profitable than a fixed-term deposit, or 15% more profitable than any investment fund. That’s the stock market as a whole, but within it, you have to choose which stock you’re going to invest in.
Just as in business, you need at least a minimum understanding of what you’re doing: an entry strategy, a defined exit plan and a basic study of the company and the market you’re investing in.
Otherwise, your only option is to put your money in the hands of third parties and let them invest it for you. You can do this both in the stock market and in investment funds, but as we’ve said more than once, doing this is the closest thing to gambling. In a bet, it can come up red or it can come up black, and whatever color comes up, if you invest this way, you’ll never learn what you need to know about investing.
2. Focusing on the short term
This mistake is made very often, either because we’ve read that great billionaires made 3,000 million dollars in a single morning, or because you’ve heard that your cousin’s friend’s neighbor makes a lot of money this way.
Well, it’s true that expert investors can make billions in less than an hour by speculating on financial market securities, but it’s also true that this is only possible when huge amounts of capital are invested.
If someone invests 1,000 million dollars at 10 a.m. and by noon the shares have risen 1%, that person has made 10 million dollars in a single morning.
If, on the other hand, you invest €1,000 at 10 a.m. and by noon your shares have risen 5%, your profit will be €50, and once you subtract commissions, you’ve made very little.
It has always been said that with stock market investing, you have to focus on the long term. Over the long term, securities rise and fall constantly, and may even go through a long bear market, but over time they will tend to stabilize and increase in value as the years go by. Of course, along the way, a stock’s value may rise for some specific reason and break through resistance levels, which would be a good time to sell.
What is clear is that one way many of today’s millionaire retirees invested was to start putting in the equivalent of 100 euros a month back in 1960, and today their capital is 67% larger than if they had put that money into a pension plan.
Of course, if some of them had decided to sell their shares in the 1990s, their return would have been 89% instead of 67% in some cases. As we’ve said on several occasions, stock market investing, when you understand it, is the most profitable investment.
In short: as a general rule, investing in stocks pays off if we let the investment mature.
3. Trusting financial advisors and banks
Robert Kiyosaki said it long ago: never trust those who advise you for a commission. When I read that many years ago, I doubted it, because I thought: who better to advise you on investments than someone whose job is giving advice?
As I grew older, I realized what Kiyosaki really meant. More and more, investor communities give the same advice, especially when it comes to banks: never invest in the investment fund your bank offers you.
Bank managers are mere salespeople selling products. They have a boss above them who pushes them to sell the financial products that bring the bank the most profit and the manager the biggest commission. So they aren’t looking for returns for the client, but for profit for themselves.
Money is neither made nor lost; it simply changes hands (Wall Street).
A bank has two types of investor clients, the small investor and the big investor, so it has to keep one of them happier, and you can guess which one. It isn’t that worried about delivering returns to the investor who puts in €5,000, but it does care about delivering returns to the investor who puts in €500,000. So it launches two types of investment funds.
The first is the one you invest in; the second is the one that generates profits for the big investor, thanks to the contributions of small investors. That’s why it has been shown that no investment fund offered by a bank has achieved the same returns as an individual investing in the stock market for more than three years in a row.
So it’s more than proven that by investing on your own, you have a 75% better chance of getting higher returns than by investing in the fund your bank offers you. Do you still think investment advisors play a big role?
Not to mention brokers, and I don’t want to belittle a broker’s work, because some have more than earned their reputation through successful investments. But have you ever wondered why most brokers don’t invest their own money in stocks when they’re certain those stocks are going to rise?
The sad truth is that they’re only human, just like investment gurus. They recognize the risks and get their information from the same place you do: the financial news. For years now, good brokers haven’t just analyzed charts, drawing lines and trying to work out a stock’s equation.
Now they try to analyze companies, their strategic plans and expansion projects, and even so, never forget that for an investment to give you a return, someone else has had to lose out on that same stock.
Once again, a broker may advise you better or worse, but as you mature as an investor, you’ll start to see the broker for what they are: someone you need in order to invest your money in the stocks you want to invest in.
These are the three most common mistakes investors tend to make when investing. We’re preparing a follow-up article covering other, more serious mistakes that can bankrupt you.
Further reading
- Why stock market investing is the most profitable investment
- How to invest in the US stock market
- What a great investor analyzes before investing
- Company mergers: a good time to invest
Featured image: Unknown author, CC0 1.0, via Wikimedia Commons.
