Common Investing Mistakes to Avoid
Anyone else need some Dramamine after following the markets this week?
The volatility is out of this world… But what’s been going on isn’t normal.
It’s called irrational exuberance. And it makes investors do reckless things.
That’s why today I’m going to spell out two common rookie mistakes you should avoid at all costs.
Pump the Brakes
The markets are at all-time highs, and they’re flooded with novice investors.
The number of individual investors in the market has doubled over the last decade, with much of that jump having occurred in 2020.
Some people are blaming the pandemic. People have been stuck at home for almost 11 months now. And no amount of board games, TV binging or banana-bread baking can ease the boredom.
Now add in the growing popularity of commission-free trading on apps like Robinhood, stimulus checks and rate cuts.
A quick internet search will show you just how many outlets are recommending where to invest your stimulus checks.
Don’t get me wrong… I think it’s fantastic that more people want to take charge of their finances. They should!
But they’d be foolish not to recognize that we aren’t living in normal times. We’ve reached the point of euphoria.
And any seasoned investor will tell you that euphoria is inevitably followed by anxiety, panic and despondency.
Rookie Mistake No. 1
One common mistake that investors make in overvalued markets like this one is to fall victim to the “buy high, sell low” strategy (if you can call it that).
They get seduced by the glamor of a new partnership, a new product or a rating upgrade.
It’s like the lust in the beginning of a new relationship. All is well and good… for a while.
But they fail to do their homework on the long-term growth prospects of the underlying business. And then the breakup hits.
That’s why, when the herd starts running in one direction, you need to take a hard look at your investments.
It’s time to either cut and run – profit off of the euphoria and get out fast – or bunker down and withstand the volatility. Because you know that when the dust settles, you’ll still have a stake in a solid company.
Rookie Mistake No. 2
Another common mistake that investors make is to be overexposed to one company or one sector.
Here are a few, er, hypotheticals…
Just because Bitcoin is taking off, it doesn’t mean you should buy a piece of every cryptocurrency out there.
Just because clean energy is hot right now, it doesn’t mean you should sell your blue chips.
And – for the love of God – just because thousands of Reddit users plow into a gaming retailer past its prime, don’t blow your nest egg on it.
Overexposure is just as dangerous as never playing the game at all. Because it means you aren’t properly sizing your positions.
Use a stock position size calculator (like this one) to help avoid the total destruction of your portfolio with a single trade.
And, in any case, when in doubt, never invest more than 4% of your portfolio in a single trade.
Next Up: Anxiety
I don’t need a crystal ball to know that the next wave of investor sentiment will be anxiety…
Followed by panic, depression and, eventually, hope.
That’s just what the markets do.
Investing is a wild ride. There are no two ways about it.
But try to avoid these two market traps and keep a level head. Take the emotions out of the equation. And always do your homework.