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4 Common Mistakes to Avoid in the Stock Market

4 Common Mistakes to Avoid in the Stock Market

 

Wanting to be the next Warren Buffett is one thing; actually making even a fraction of the money he makes in a year is quite another. Truth be told, the biggest enemy of an investor is none other than himself. More often than not, it is no one else but yourself who prevents you from making the right investment decisions.

 

 

Does the below picture rings a bell?

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A study on investor behavior commissioned by the US Securities and Exchange Commission found that investors tend to make the same mistakes time after time. The report of the study pointed out that many investors damage their portfolios by under-diversifying, trading frequently, following the herd, selling winning positions and holding on to losing positions. The study also pointed out overconfidence as the chief emotion leading to investment mistakes.

 

 

So here are the 4 common investment mistakes you should avoid:

  1. Overtrading: The study found that investors who trade frequently tend to underperform. There are two reasons for this. The first is overconfidence. They believe that they know the market inside and out and can turn anything they touch to gold. This is a dangerous thing as it can lead to irrational decisions. The second is increased fees due to trading. The more you trade, the more charges you incur that eats into your profits.
  1.  The herd mentality: A lot of US investors lost a lot of money when the so called dot.com bubble burst in 2000 and then again when the US sub-prime housing market crashed in 2008. Many of these investors had listened to their ‘natural instinct’ to follow the herd when prices were rising at unprecedented rates, not realizing that what goes up rapidly can come crashing down equally fast. So, avoid the herd mentality. Instead, you may want to take the contrarian view and wait for a deep correction to enter the market.
  1. Momentum investing: Many traders look at the short-run momentum rather than the long-term trend to make quick profit. For example, you may look at the few days’ uptrend and buy the stock of a certain company thinking that the price would go further up, while the major trend may actually be a downtrend. Once the short upward moments loses steam, you will find yourself in big trouble. Avoid momentum investing. Focus on the news flow before investing and look at the big picture. Unless you are a great chartist or technical investor, it is good to invest long term by buying a great company stock at a good price.
  1. Selling at the wrong time: One big mistake investors often make is selling winning stocks while holding on to the losing ones. The reason they give is that they want to recoup the loss made by the loss-making stocks. But what usually happens afterwards is that the high performing stocks (which were sold) continue to perform well while the underperforming stocks (which are retained in the portfolio) continue to make losses. A sound reason to sell off a winning stock is when its price is too high to be justifiable; sell off a losing stock when you know you have made a mistake, the company’s future prospect is really bleak and irreversible or that you can have a much more significant upside in another stock.

 

Insure yourself, protect others.

Yours,

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profile picThe author of this article is Mr Sean Ong. He is a Certified Life Coach and a Chartered Financial Consultant with more than 14 years of experience in the finance industry. A shareholder with the one of the largest independently-owned financial advisory company in Singapore, Sean also leads a top financial advisory group and has been featured on the local TV and radio. In his efforts to contribute to the society, Sean ran 1,000km over 87 days to successfully raise more than $13,000 for a children charity in Year 2012. He also published a book called “Mend Your Socks!” where sales proceeds were donated to charity. Sean can be contacted at oneprofessionaladviser@gmail.com.

 

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