I was about to write an article on investors’ common mistakes and then I thought of adding a little bit of color to the black & white world of finance by matching them with the 7 deadly sins. What’s weird about these common investing mistakes is that we all know them… and we still commit them once in a while! This is why I thought getting a little refresh wouldn’t hurt 😉
#1 Sloth – Investing Without a Plan
I had been investing for several years without a plan. I knew roughly what I was doing but not completely. I couldn’t tell what my investment strategy was as it was never written on paper. How come? Simply because I was too lazy to do it! What really helped me to create an investment plan is authoring my financial blogs. Since then, I now put my investment moves in writing and publish them. I kill 2 birds with one stone. Having an investing plan is very important. This includes knowing your risk tolerance and determining your asset allocation. For example, do you know where dividends fit in your asset allocation?
#2 Envy – Tax Optimization at all Costs
The last thing we want as an investor, is to see the Government getting their cut of our profits. We envy the Governments’ power to collect tax so much that we continuously seek tax optimization through our investments. However, tax optimization strategies should be applied once the investment strategy is defined; not the opposite. Seeking to save taxes at all costs can end-up being very costly in terms of investment return. Tax optimization is a pernicious investing mistake as it is often seen as a plus in an investing strategy.
#3 Pride – Buy a name
I have seen many people buy companies they like. However, they don’t really like their financial results or revenue growth perspectives; they like the brand! Buying a company for the brand is not a good idea. I actually hold RIM in my portfolio and one of the reasons was because I really like their brand and the BlackBerry… I’m starting to think that I have made a mistake! My pride in the BlackBerry is telling me that they will bounce back and that the price will go up… I hope that my Pride is right 😉
#4 Lust – Fall in Love With a Stock
At one point or another, we all fall in love with a stock. It’s either because it has been performing well for many years or because the stock is a steady dividend payer. But falling in love with a stock will prevent you from reviewing its financial results on a annual basis. It might also help you find excuses for poor results. This is why you become too patient with losers… because you love them!
#5 Gluttony – Buying all Kind of Financial Products
Some people just can’t get enough; they hold CDs, bonds, dividend stocks, mutual funds, ETFs, hedge funds and notes in their portfolio. They think that by holding the “flavour of the month” they are diversified. Most of the time, the most simple asset allocation is the best. Try to keep things simple and invest in products you understand.
#6 Greed – duh!
We all want to make money with our investments, right? Well greed is hidden just under the surface each time we think of investing. This is probably the most common investing mistake of all. It’s important to correctly assess the level of risk before buying a stock. Don’t overlook the risk only to consider potential returns. Some stocks are just too risky for what you think you will get from it.
#7 Anger – Trading on Emotions
It’s not only based on anger but investors often make the mistake; they trade based on their emotions. Each time there is a bad news on the stock market, you should ignore your computer and not look at your stocks. If you do, you might be tempted to trade them because you are afraid to lose more money. Don’t fall in the trap and avoid this common investing mistake.
Final Thoughts on Investing Mistakes
Overall, there are some common investing mistakes we will never make. On the other hand, we are all more inclined to make others. Out of all investing mistakes, I am more tempted by Greed (not assessing the right level of risk of each trade). I guess that since I am young, I don’t really mind when I lose some money. But this attitude can be very costly over time. What about you? What is your favourite investing mistake?
Mike, great post! Probably the only one I’m not guilty of is number 5. I’d have to say that, out of all of them, number 7 has got to be the most seductive and most dangerous, though. Keep your emotions in check and you are in better shape than most investors!
Those definitely are sins. I always want to look for better funds and different asset classes to diversify in but then I tell myself that I will down myself in fees and end up getting nowhere. It isn’t always easy but discipline is necessary if anyone wants to make money investing.
I totally agree with you as discipline is the number 1 quality you need to be a good investor!
This is a great post. I would say regrettably that greed is probably my most common struggle from your list. I always would like more shares! :), but I do my best to be content with what I have. thanks again for this post..
Excellent post and very true. I am amazed at how often people do not have a plan or how often that plan is based around tax.
Thanks for sharing.
w. adam mandelbaum esq.
Number 5 is worth tattoing on one’s eyelids. If you have proven successful in one sector of investing/investments, or with one particlar type of investment–why not stick with that? Dividend investing has done quite well for me, and for many thousands of others. I pick my own stocks using the aristocrats as a starting point. Why would anyone who is successfully dividend investing be sidetracked by the commodity market, or more “exotic” venues. It’s about making money, not looking good while doing so.
Based on the above list I’d say I’m doing pretty good and could probably knock each off my list except for greed. I think it’s just human nature to get greedy every once in a while, but I think I do a pretty decent job of keeping that in check. I’m in this for the long haul and adapted a pretty conservative style.
What would you recommend as a passive investment?
Obviously not everybody has relevant knowledge and time to watch closely the market.
I think that buying individual stock and watching them is time consuming for most of the folks and very very risky. Two facts, as food for thought:
– Only 202 of the 500 biggest companies in the United States in 1980 were still in existence 20 years later.
– On December 29, 1989, Tokyo’s Nikkei stock average reached its all-time peak of 38,915.87. Twenty years later, the Nikkei has never again reached that level — and, in 2009, reached a new low of 7,054.98.
What do you think?
I think that knowledge is the key. If you are looking for passive investment but you have very limited knowledge in investing; everything is risky.
You have 2 options:
– holding a portfolio of ETF’s
– building a dividend paying portfolio
the first option will most likely provide capital gain but fluctuations may be greater. The dividend portfolio may be a great option if you select carefully your stocks. However, in both cases, you won’t get much results if you don’t have investment knowledge…
My Own Advisor
Great article man!
Great article and really good comments as well. Keep up the good work guys.