Investment Pitfalls to Avoid

July 24, 2013 Investing Prateek

Whether you are new to investing or have been at it for quite a while, it is easy to fall prey to numerous common investment mistakes. It is important to remember that you will never be able to fully avoid these mistakes because even the best investors make them. Rather, the goal is to minimize the number of these mistakes that you make overall. Keeping this universal truth in perspective will help you get back on track when you stumble, and it will also help you learn an important lesson for the future.

Don’t Fall Victim to Greed

When you first start investing in the stock market. picking great securities is only half the battle. Making a great stock or mutual fund choice can only take you so far. What do you do once you’ve enjoyed a sizeable unrealized gain? You can choose to buy more, hold, or sell your security. Obviously you wouldn’t buy more if you’ve had a significant upwards run, because you are only raising your average cost per share. If you’ve done very well, you may think it might be wise to just let it be since you are using “house money”. That’s not always the best choice.

Learn to trim your gains. If you insist on letting the stock continue to run, then you should the harvest the majority of your profits. Continue to let the original invested amount remain in stocks. By doing so, you will be in an advantageous position as you’ll have substantial downside protection if the stock price starts to slip. Unfortunately, I have seen many people buy a stock and accrue an incredible unrealized gain in a relatively short period of time, only to lose most of their gains because they didn’t sell when the time was right.

Don’t Involve Your Emotions

What are some of the ways you can avoid this? Set a time and target. What does this mean? Determine the length of time you want to hold the stock or security. By buying you are essentially predicting some type of change, so try to define distinct parameters. Set a stop-loss for yourself to auto trigger if the security dips below a certain level (Be sure to keep this stop-loss low enough, or else you might automatically trigger a sell order on a volatile trading day). Also, set a target on your gains. Adhering to this amount just requires you to be disciplined. Although the stock may continue to run higher, stick to your goals.

Also, if your stock slips below the stop-loss threshold do not. under any circumstances, throw good money after bad. This may seem intuitive, but I’ve seen many investors justify spending additional money to “lower their average cost” per share. In reality these investors are wishing for a recovery. A recovery that is unlikely to happen.

Weigh the Importance of Your Facts

Reading a bit of financial news doesn’t automatically give you an edge on the competition. As a matter of fact, any information that is public for more than a few moments is already priced into a stock or security. For example, if Company X is projected to announce incredible earnings for the second quarter, you shouldn’t necessarily assume that this makes the stock a solid buy. This is something that everyone else knows, as well.  Suffice it to say that all market news is public, so it’s a mistake to underestimate the incredible speed of the information.

Set Realistic Goals

If you are setting goals you are already on the right track. However, make realistic goals for yourself. Remember the S & P 500 returns 10% on average annually, and mutual funds return 12% annually on average. Therefore, it wouldn’t make sense to set a goal of 25%. Don’t forget to take the time to define concrete goals for your future. Remember, investing isn’t about getting rich quickly. It is about making the most out of what you have to provide a great future for yourself.