Investing can be incredibly dangerous if you get right down and think about it. If you make just a few bad choices why, you can wipe out an entire lifetimes worth of careful savings and planning and endanger your entire retirement… heck you can even get yourself thrown out on the street.
Of course, this is only an extreme possibility, but it is a possibility nonetheless; which makes investing in the stock market an apprehensive undertaking for many individual investors, but it doesn’t have to be if you just follow these few simple steps to help you avoid some of the most common stock market investing mistakes.
The first mistake that most people make is to fail to diversify. If you just purchased a few stocks and spent all of your savings on those few stocks than the chances increase exponentially that you may lose your money. All it takes is one or two of those stocks to decrease in value and you can quickly lose tens of thousands of dollars or more.
If on the other hand, you had simply diversified into many different stocks then the fact that one or two stocks decreased would not be a life-threatening or retirement threatening situation. Diversifying allows you to watch dispassionately and notice the stocks that aren’t performing well, at which time you simply sell them and reinvest them into others that are performing well.
Not only is it a safety net in the fact that I just mentioned above, it also has mathematical properties that are beneficial as well. All stocks have an inherent market risk which means that if something happens to the market as a whole it will correlate and effect an individual stock as well. By purchasing many different stocks you spread that market risk out and in effect decrease the market risk, sometimes down to zero depending on how many different stocks you own and how correlated each of them are to the broad market.
Another mistake that many people make is poor record-keeping. How can you know which of your stocks are performing well and which of your stocks are tanking if you don’t keep good records? These days stock brokerage firms do a pretty good job of sending you reports, the problem is they don’t send those reports until after the month is over at the earliest, and sometimes they only send them out quarterly which is not soon enough for you to determine a poorly performing stock and sell it.
The last mistake I’ll discuss is what I call the guru syndrome. Many individual investors look for gurus; people they think of as experts in the field of stock market investing and then they tend to follow the advice of those gurus. This often ends up poorly because those gurus often have their own agenda that has little to do with offering you good advice. Stocks should be purchased based on sound financial analysis not on a hot tip from somebody you think of as an expert.
So there you have several mistakes that individual investors make that you can now be on the lookout for so that they don’t destroy your stock portfolio.
