April 19: Stock Investing Mistakes that Make a Difference

by David Jenyns on April 19, 2007

Investing is the most important thing that you can do to secure your financial future. Trading stocks is a centuries’ old practice and with a good brokerage firm, you can benefit from investing in stocks. There are, however, some common investing mistakes that people make that can result in huge losses and missed opportunities. In order to benefit from the stock market, here are the most common mistakes and tips to avoid them.

The first most common mistake in investing in the stock market is waiting too long to start investing. The perception of investing is that it is reserved for older, financially established people who can invest large sums of money. This is a misconception that is limiting people from tapping into the power of investing. Waiting just ten years can make a huge difference in the total gains that one can make over their lifetime. For example, investing just $2000 a year (that’s just $170 a month) starting at the age of 26 can yield $2,114,379 by the time you are 75. This is with an Annual Return Rate (ARR) of 10% per year steady through the life of the investment. The same investment, with the same ARR, made ten years later at the age of 36 will result in a return of only $802,895 at the age of 75. That is a 1.3 million dollar difference. If you are not able to invest as much as $160 a month, set aside $25 per month. Even this small amount can have a large impact over time.

It is shocking that many people will put more time and research into choosing an MP3 player or home theater system than they will researching the stocks they will invest in. It is imperative that you take the time to understand the financial history of the companies you wish to have shares with. Make sure that you understand what you are buying and how it will benefit you in the long run. It is also important to keep in mind that you must remain objective when choosing stocks. Stocks that you have researched well and carefully selected are more likely to increase than ones you choose based on a “feeling.” Put your emotions aside and consider your options carefully. Taking time to research and investigate is also important when choosing your financial advisor. Consider meeting with a few candidates and evaluating their approach to investing. If you are meeting with someone on a recommendation, make sure that the person who recommended the advisor is someone who is qualified to do so.

Another common mistake is confusing gambling or speculating with investing. Investing in stocks is part of a long-range financial picture and not a get-rich-quick scheme. While there certainly are high yield quick return programs out there, it is wise to limit your participation in those programs. Day trading is one of these types of programs. When someone is involved in day trading they trade very rapidly in and out of stocks in order to profit daily from marginal changes in the market.

This practice may seem easy to profit from but it actually results in more losses for investors than gains. Similarly, some try investing over a short period of time in very risky stocks. A short-term investment of six months to a year in a “hot stock” does not belong in a well-thought out financial plan. True investing should be done in quality companies over a period of several years. Finally, listening to someone who has a “hot tip” is a quick way to lose a lot of your investment. Research any tips you get carefully and only invest if the numbers pan out, no matter how much others insist that this is the stock to have.

Finally, you need to remember to diversify your investment portfolio. Loading it up on one company’s stock is unfortunately a common practice for many investors. Additionally, having too much stock in one specific industry can also be a recipe for disaster when the market changes. Spread your money over several different companies and different industries for the best long term investment.

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