9 Common Investment Mistakes to Avoid

Struggling to see your investments reach their full potential? Thought you would have seen greater returns by now? You might be making some common investment mistakes.

What may seem like innocent investment mistakes can be costly not only in the short-run but particularly in the long run. Small amounts of money, when invested properly, can lead to huge gains over time. But just one or two minor mistakes can derail your investment growth substantially. 

Here are the 9 common investment mistakes you need to avoid right now if you want to see your money grow and move you closer to financial freedom.

Playing the Waiting Game

How often do you think, “The market is too expensive right now. I will wait until it drops a little before I invest.”

You wait a month while watching the market climb. Up and up and up. The moment of “dropping a little” just doesn’t happen.

Finally you cave in, putting a chunk of your money in investments.

If only you had invested a month earlier! You could have gotten in at an even better price.

We all think we can time the market and wait for the PERFECT time to jump right in.

But the fact is that you can’t time the market. If everybody could time the market, everybody would buy low and sell high, thus beating the market (i.e. S&P 500) performance.

You might read on the news that the stock market just hit a new all-time high. 

You might think: Wow! An all-time high? It must be expensive to buy stocks right now while it’s at an all time high. I’ll just wait for the next dip in the market before I jump in.

The crazy thing is that the stock market hits all-time highs fairly regularly. And after they hit all-time highs, they tend to continue to do well. Just look at this chart of the S&P 500 following all-time highs: 

Following an S&P 500 all-time high, the average one year return is 10%, the average three years return is 31%, and the average five year return is 54%. Those are stellar numbers.

Don’t be tricked into thinking it’s just “too expensive”. The stock market has done phenomenally over the past century and the long-term trend has been and continues to be UP!

Not Starting Early

How often do you think, “I’m still young, I’ll  just wait a little later to invest. Maybe I’ll start in a few years.”

The longer you wait, the less time you give your money to grow due to compound interest.

Here’s an example of how quickly your money will grow, the earlier you begin investing.

Scenario 1: 

If you started investing at age 19, contributing $2000 a year for just the first 8 years, then not contributing anything else for the remainder of your life, you’ll come up with a nest egg of $427,918 at the age of 65. You essentially just turned $16000 into $427,918.

Scenario 2:

If you started investing at age 30, contributing $2000 a year for 36 years, your nest egg will be just $374,204 at the age of 65.  You turned $72,000 into $374,204.

Scenario 2 is sad! You had to invest MORE, but you ended up with LESS! That’s because your money has less time to accumulate compound interest.

Not starting early is but one of the common investment mistakes you need to avoid if you wan to to build your wealth via the stock market.

To read in-depth on how compound interest works, check out my article here.

Following Predictions from the “Experts”

There are no experts who can accurately and reliably predict the future.

Experts who predict a recession every year for 15 straight years, will probably be right at least once eventually. Even a broken clock is right twice a day!

Here are some predictions from the so-called “experts” that turned out to be entirely inaccurate:

1. Peter Schiff, CEO and chief global strategist of Euro Pacific Capital Inc., predicted a market crushing treasury collapse to hit around 2013. Didn’t happen. Source: Forbes
2. Ron Paul, presidential candidate who served as the U.S. Representative for Texas’s 22nd congressional district, called a market crash in 2014. Didn’t happen. Source: CNBC
3. Economist James Dale Davidson said a stock market crash was imminent in 2016. Can you guess what happened? No stock market crash in 2016. It just didn’t happen. Source: The Capitalist

The list really goes on and on about “experts” who came up with absurd predictions which never came to fruition.

Some experts may be lucky enough to correctly predict the future ONCE.

For example, John Paulson earned his firm more than $15 billion by purchasing credit-default insurance against billions of dollars of subprime mortgages before the market collapsed in 2007. 

But nobody can predict the future time reliably and repeatedly. 

John’s firm’s assets slumped from a peak of $38 billion in 2011 after investment losses and client defections: As of November 2018, it ran less than $9 billion — and most of that was Paulson’s own fortune. Source: Bloomberg

Easy come, easy go.

Lightning doesn’t strike twice. Especially when it comes to “expert” predictions.

Not Investing Automatically

One of the most effective investing strategies is investing automatically at regular intervals (like every two weeks, or every month) through dollar cost averaging.

Dollar cost averaging is the process of investing the same amount of money every month. 

Let’s say you can afford to invest $600 a month. If the fund you want to buy is $50 in April, then you’ll buy 12 shares that month. If in May the fund is valued at $40, you’ll buy 15 shares. If in June, the fund is priced at $60 a share, you’ll buy $10 shares. 

So you see here you’re investing the same amount every month, but you’ll buy more shares when the share price is low, and you’ll buy less shares when the share price is high.

This simple technique means that you’ll take the emotion out of investing.

We are notoriously bad at investing when emotions are involved. When prices are high, we tend to think that we’re missing out on a rally and we end up buying large quantities of overpriced stocks. And when prices are low, we tend to think that the stock market is collapsing and that we should sell everything. This is precise moment, when we should be buying more!

By not investing automatically through dollar cost averaging, you may let your emotions dictate your investing strategy, rather than what’s best for your portfolio.

Check out my article here for more info on dollar cost averaging.

Buying Hot Stocks/Investments

Remember when Bitcoin was all the rage? It filled just about every investment news outlet in 2017.

One man sold all of his belongings to invest in Bitcoin. Source: Business Insider

According to an article dated 12/11/17, people were taking out mortgages to buy bitcoin. Source: CNBC

On the day that article was published, Bitcoin’s price hit its price peak of $19,140.

Remember what happened next? It was nasty.

The bubble unsurprisingly popped, and Bitcoin took a steady nosedive. Nearly one year later to the day, 12/10/18, Bitcoin’s price was $3252, an 83% decrease from its high just one year ago.

As of this writing in October 2020, Bitcoin has recovered a bit to 10,700. But I still would not touch it with a ten foot pole.

Like tulip mania, the price of hot investments get overinflated and will eventually burst.

There’s a common investing mantra, that if your coworker is talking about a hot new stock you need to buy right now, you should probably avoid it at all costs!

Buying Underperformers

Macy’s stock was $45 a share in 2007. It dropped all the way to $8 a share by November 2008. You might have thought, “Wow the stock has dropped so much, buying now would be taking advantage of a huge sale! If it recovers back to $45, you’ll make a whopping return of 462%!”

There are several problems with this line of thinking:

1. You won’t be able to time the market perfectly for the initial purchase. It’s easy for us to analyze the situation after the fact, but it is nearly impossible to buy stocks at its low point in real-time. 
2. You won’t be able to time the market perfectly for the final sale. You might have thought that you would have sold it when the price returned to $45 which occurred around April 2013. But it would have been insanely difficult, and nearly impossible, to time it correctly. 
3. As the price hit $45, you might have thought, the stock is doing so well, I should just let it ride! You would have been right for a short period of time. The stock continued to climb all the way to $69 in July 2015. However, if you held on to it through October 2020 and you’d be holding onto a $6 a stock.

Underperformers give the illusion of a discount. Sometimes they rise back to their pre-drop levels. Sometimes they don’t. Either way, it will be nearly impossible to buy and sell and the right times. 

Everything looks crystal clear in hindsight. But don’t be fooled into thinking what goes down must come up. This is a common investment mistake. Sometimes, it goes down and stays down.

Timing the Market

Sadly, In a comparison of professionally managed large cap funds, S&P Dow Jones Indices determined that after 10 years, 85 percent of large cap funds underperformed the S&P 500.

After 15 years, nearly 92 percent underperformed the S&P 500. Source: CNBC

If only 8% of professional money managers can beat the market, how confident do you think you can?

Timing the market is one of the common investment mistakes you need to avoid now.

Check out my article here if you want to know exactly why picking stocks and trying to beat the market by picking individual stocks, by and large, is not an effective investment strategy. 

Picking Individual Stocks

Here are a few snippets I found of stock picking gone wrong:

Fortune magazine voted Enron “America’s Most Innovative Company” for six consecutive years, from 1996 to 2001. Yet that final year, Enron succumbed to the largest corporate scandal and flameout in history and its stock tumbled from $90 a share to 6.2 cents a share in a span of just 16 months.

On March 11, 2008, Cramer responded to a viewer’s concern over Bear Stearns’ liquidity problem. 

Here’s Cramer’s advice, word for word: “No! No! No! Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear.”

On March 14, Bear Stearns stock fell 92% on news of a Fed bailout and $2-a-share takeover by JPMorgan.

Source: Go Banking Rates 

Through a combination of failing to time the market and failing to pick the right stocks, the average investor has dramatically underperformed the market, returning an annual average of 1.9% vs. the market which has returned an annual average of 5.6%.

Buying Commodities

Every few years, and especially during times of increased inflation or recession fears, there seems to be a lot of speculation about gold as a hedge or an investment. 

However, when we’re talking about long term investment performance, the S&P 500 and the Dow Jones has significantly outperformed gold and silver. 

Here are the returns of the following markets/commodities from July 1, 1896 to Oct 1, 2020:

S&P 500: 83,557%

Dow Jones: 81,861%

Gold: 9,135%

Silver: 3,467%

The comparison isn’t even close. For better long-term returns, put your money in the stock market, NOT commodities like gold and silver.

Putting It All Together

For your investment portfolio to reach its maximum potential, you’ll have to make good investment decisions like investing regularly and dollar cost averaging your investments. However, there may be times when you’ll be tempted to make poor decisions. Once you identify what these common investment mistakes are and understand why they are poor decisions, you’ll be able to recognize them and resist your temptation to give in. Save the poor decisions for the poor performers. You, on the other hand, will continue growing your investments!

The common investment mistakes that people make that can derail their goals include:

1. Playing the Waiting Game
2. Not Starting Early
3. Following predictions from the so-called experts
4. Not auto-investing
5. Buying hot and popular stocks
6. Buying Underperformers
7. Timing the Market
8. Picking Individual Stocks
9. Buying Commodities

Let me know your thoughts below!

Which of these common investment mistakes have you made that hindered your investment growth? Are there any other common or even not so common investment mistakes you think should be on this list?