Live My Life Online

I have been investing in share market since 1996, I have learned a lot, mainly from trial and error. Over times, I have gathered 36 deadly mistakes that investor (like me) would have made, in order to avoid to pay this expensive lessons I paid.

1. Looking for instant results. Most investments take time to grow, particularly if you are invested in the stock market. Too many investors make the mistake of getting easily frustrated and selling quickly. While there are successful day traders, it is not recommended for most people and not the way to build an investment portfolio.
2. Chasing results. Yesterdays hottest stocks or funds are not necessarily today’s. Research investment vehicles and look for those that you anticipate will do well based on past results and indicators of future performance.
3. Not thinking of allocation first. Buying a stock, bond, fund or other investment before determining your asset allocation is a very common mistake. Too many people put the cart before the horse. The first step toward successful investing should be determining how much you plan to invest in each asset class (i.e., bonds, stocks) to meet your goals.
4. Not assessing your level of risk. Essentially, you have to consider how much money you can comfortably afford to lose without losing too much sleep. Investors frequently make the mistake of jumping into high risk investments for which they were not prepared.
5. Investing too conservatively. On the other hand, long-term investments, in general, will do better in the stock market. The long-term annual average return for the stock market over the past century is around 10%. You may, of course, do better or worse than that in the years that you invest. So the rule of thumb, invest according to your age, if you are at age of 25, invest 75% into higher risk investments, and leave 25% in bonds or fixed deposits. So when you get older, your risk portfolio adjusts accordingly.
6. Not doing your homework. No matter what type of investment instrument you are considering, it is important to do the research. There are numerous web sites and publications in which to research and compare companies.
7. Deviating from your investment objective. One of the biggest mistakes investors make is not sticking to their original investment strategy. Do not let yourself get diverted by a hot tip, a sudden trend or a sudden down market.
8. Not understanding a particular investment. We have all heard stories of individuals who have been talked into investing in futures or other investment vehicles that they did not fully understand. Make sure you have an understanding of the type of investment and you are comfortable with the risks involved before proceeding.
9. Blindly following the advice of a broker. If brokers knew all of the best stocks and mutual funds they would have made enough money to retire. Therefore, you should still do some research even once it is recommended by a broker. You also have to work only with a broker whom you feel you can trust implicitly.
10. Not following your investments. Many people pay attention to their investments for a while and then make the mistake of getting sidetracked or losing interest. You should keep track of your investments on a regular basis.
11. Use credit card debts for their investments. It is not visible to use short term borrowing to finance long term investments. In other word, this is not matching in accounting term. High interest rates increase your debt, making it harder and harder to pay off. That’s reverse investing!
12. Not investing soon enough. You’re rarely too young (or even too old) to invest. Kids have the most to gain from many decades of stock appreciation. But even retirees can benefit from leaving whatever money they won’t need for five or 10 years in stocks.
13. Having unrealistic expectations. What do you expect from your stocks? 50% per year? Well, snap out of it. Even Microsoft has averaged about 30% per year over its history, and it’s head and shoulders above most other companies. Then there’s Wal-Mart, which would have increased your investment more than 900-fold over the past 30 years — which is about 26% annually, on average. Expect an average of 10% annually from the stock market over long periods. More realistically, expect anywhere from 8% to 12%, on average, during your personal long-term investing period.
14. Over- or under-diversifying. If all your eggs are in two or three baskets, you’re exposed to too much risk. (Just imagine if you’d had much of your moola in Enron — or even struggling stalwarts such as Eastman Kodak or Lucent, both down some 50% from their 1996 perches.) If you have too many baskets to count, then you probably aren’t able to keep up with each company. Between 5 and 10 stocks is a manageable number for most people, although some do well with a few more or less.
15. Holding on too long. Why did you buy a given stock? Are the reasons still valid? Has anything important changed? Have you gained as much as you expected to in it? These are the sorts of questions you should mull over regularly. Be prepared to sell under certain circumstances, whether you’ve made or lost money so far.
16. Paying too much to your broker. Aim to pay no more than 2% per trade in commissions. So if you’re buying $500 of stock, you’ll want to pay $10, tops, for the trade. I always thought “it’s only 1%, what’s the difference,” and went for the investment with better performance. I finally ran some numbers and I was shocked to learn that a difference of 1% can lower my investment performance by 25% over the course of 30 years. Instead of ending up with $1 million, for example, I might only have $750,000.
17. Letting emotions rule your investing. Don’t be led by fear, which can have you jumping out of the market just when stocks have fallen, or greed, which can have you hanging on to an overpriced winner, hoping to eke out a few more dollars of gain. Similarly, don’t stubbornly hang on to a loser, hoping to make back your lost dollars, when you could be selling and buying shares of a company you have a lot more confidence in, and make your dollars back more reliably on that stock.
18. Not knowing the basics - When I finally began investing, my first move was to give my money to a full brokerage firm to invest for me. I didn’t know anything about stocks or mutual funds. I just knew I should invest money to make more money. This was a big mistake since each trade executed by my broker cost a lot of money. Also, the mutual funds they picked weren’t good, and were very expensive.
19. Selling winners and keeping losers - This was my all time weakness. Many people knew the concept of “buy low and sell high.” So with little experience, we might ended up selling a lot of winners shares too soon but held on to the losers with the hope. Some of the stock has had nothing but bad news for years. And after each announcement investors are hoping it’s the last one. From now on, they hope, the rest will be good news. But it hasn’t happened. So keep yourself away from this kind of stock.
20. Cost averaging down - Basically this is what I called putting good money into bad money. Not only did I hold on to my losers, I bought more shares in hope of lowering my cost basis and reducing my losses. I did this blindly without additional research to find out why these losing stocks went south.
21. Investing without a goal — Not until recently did I define a real goal for my investment. This is my main retirement portfolio. Other goals, which I am still defining, are investing to subsidize my kids’ college expenses and my parent’s retirement expenses. Without a clear goal, I was chasing short-term performance and was prone to act on market swings.
22. Selling on corrections & buying at the top of the market — These are symptoms of not having a clear goal. Since I was chasing short-term performance with the objective of making more money. I occasionally gave in to my emotion and sold my investments during corrections to protect my gains. Occasionally, I did come out ahead, but most of the time I ended up rushing to reinvest my money as the market invariably rose after these corrections.
23. Buying a stock on a recommendation from a friend. This is worst that advice from brokers. The assumption here is that the friend did the research and knows about the stock. The richer the friend is, the more weight the tip has. What you don’t know is whether the friend has bought 100 shares or 10,000 shares and how much of his or her wealth is tied up in the stock. The more stock he or she owns, the more they must believe in the stock. You also don’t know how much, if any, research the friend did. Maybe he or she got the tip from another friend, and you’re only one of many in a “tip” chain. Maybe you’re the last one to get the tip.
24. Selling a stock too soon. We’ve all sold stocks that skyrocket shortly after we sell them. That’s usually because there’s some good news that caught everyone by surprise whether it’s better than expected earnings or a new product launch or even a takeover bid. Buy investing stocks and buy trading stocks. If you buy stocks for their business merits, you won’t consider selling when it has a quick run up or a down draft. That’s because you are in them for their long term development, not for a quick profit. Buy trading stocks, if you must trade, which I don’t recommend for most investors because it takes a different personality to be successful. And buy the trading stocks in your retirement accounts so the taxes won’t take any of your profits.
25. Buying a stock because it has a low price, thinking it’s cheap. We’ve all seen the high fliers get grounded. Many of them went out of business. It’s easy to think a stock is cheap if it traded at $90 a share and can now be bought at $5. The confusion is in the pricing. Just because a stock is 90% off its highs, many investors think it is only a matter of time before it goes back to where it peaked. A company with a $2 stock can actually be more expensive than a $60 stock. If you stop thinking that you are buying stocks and instead start thinking of it as buying companies, the distinction becomes very clear. With all other things being equal, if I were to give you a choice between buying 10% of company A for $1,000 or 50% of company B for $2,000, which would you rather buy? A stock could be priced low because there are so many shares outstanding that each share represents an extremely tiny piece of the company.
26. Forgetting that markets and prices are driven as much by psychology as by valuations. If markets were only driven by valuation, they would not be very exciting and we could all just invest in index funds, checking our portfolios once a year.
27. Investing too early in an emerging technology can easily see your portfolio wiped out if you have concentrated positions.
28. They say a trader is only as good as his last trade. If you are a long-term investor, you probably don’t have to worry about this but there is an important lesson to be learnt from that statement. Markets, sectors and businesses constantly change and you have to adapt quickly to stay ahead. What worked in a bull market will most likely not work in a bear market and hence relying on a single technique or strategy through different market conditions is a big mistake. While it is important to retain some of your core beliefs, it is equally important to tweak your approach based on the input you are receiving from the market and the real world. Start-ups do this all the time.
29. Ignoring companies you are familiar with and whose products you use every day in favor of exotic or complex investments for a chance of huge returns. So start to look for your household brands like P&G, Kraft, WalMart, etc.
30. The last and most critical mistake an investor who is just starting out can make is giving up on investing altogether after taking a hard (but not critical) hit.
31. No investment strategy. After reading all the possible mistakes, we can actually sum them up into a proper strategy that serves as a framework to guide future decisions. A well-planned strategy takes into account those important factors that I have highlighted earlier such as time horizon, tolerance for risk, amount of investable assets, and planned future contributions.
32. Investing in stocks instead of in companies. Investing is not gambling and shouldn’t be treated as a hit-or-miss proposition. Investing is assuming a reasonable amount of risk to help finance enterprises you believe have positive long-term growth potential. Analyze the fundamentals of the company and industry, not day-to-day shifts in stock price. In addition, examine a company’s corporate governance profile to make sure it has basic corporate governance protections. It may help you avoid a future problem.
33. Not using charts and being afraid to buy stocks that are going into new high ground in price. One of my biggest mistakes was that a stock making a new high seems too high to me. But most of the time that personal feelings and opinion was far less accurate than the market itself.
34. Concentrate your time on what to buy and once bought, lack of strategy on when and under what circumstances the stock must be sold.
35. Fail to make up decision quickly. One of my mistakes was fail to make up my mind when a decision needs to be made. I believe most of us don’t follow proper guidelines or don’t have any guidelines.

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