The priority for most equity investors is to create long-term wealth. Why, then, do so many of them make their own financial lives more difficult than they need to be?
Take the US market, for instance. Did you know that the average holding period of shares on the New York Stock Exchange is just 5.5 months, compared with the 1950s peak of eight years ?1 What’s more, thanks to impatience and a greater prevalence of data and new tools, 50% of US equity market trading volumes are driven by high frequency trading.2
Even sell-side analysts often lack sufficient discipline. It might surprise you to know that while most analysts make earnings forecasts for one or maybe two years ahead, only around a quarter of that number make forecasts out to four years.3
These statistics appear to be at odds with the goal of generating wealth over time. But those individuals seeking long-term performance can use this to their advantage, since the popular desire for short-term returns seems to have left the long-term opportunity intact.
Are you watching your investments underperform year after year? I’ve been there too! As someone who’s made plenty of financial blunders (and learned from them the hard way) I wanted to share some wisdom that might save you from the same costly errors that plague many investors.
While the article title mentions 4 common investment mistakes, I actually found 8 critical errors that repeatedly trip up investors. Let’s dive into these mistakes and learn how to avoid them!
1. Not Understanding Your Investments
One of the biggest mistakes I see investors make is putting money into things they don’t really understand. Even Warren Buffett, arguably the world’s most successful investor, warns against investing in companies whose business models you can’t grasp.
Think about it – would you buy a car without knowing how it works or if it’s reliable? Probably not! Yet many people invest thousands of dollars in companies or financial products without understanding the basics.
How to avoid this mistake
- Research thoroughly before investing
- If a company’s business model seems too complex, consider it a red flag
- Start with ETFs or mutual funds if you’re a beginner
- Ask questions until you fully understand what you’re buying
I once invested in a biotech company because it “sounded innovative” without understanding their product pipeline or FDA approval process. Needless to say, I learned this lesson the expensive way!
2. Falling in Love With a Company
It’s easy to develop an emotional attachment to certain stocks, especially when they’ve performed well for you. Maybe you love Apple products so you invest heavily in Apple stock, or perhaps you work for Amazon so you keep buying more shares.
This emotional connection can cloud your judgment and make it difficult to sell when fundamentals change.
How to avoid this mistake:
- Remember investments are about making money, not emotional attachment
- Regularly reassess why you own each investment
- If fundamentals change, be prepared to sell
- Set specific criteria for when to exit a position
As Warren Buffett says, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” But this doesn’t mean holding forever – it means having conviction but also being willing to change your mind when facts change.
3. Lack of Patience
We live in a world of instant gratification, and many investors bring this mindset to their portfolios. They expect quick returns and get discouraged when growth is slow or the market experiences temporary setbacks.
Building wealth through investing is typically a slow, steady process – more marathon than sprint.
How to avoid this mistake:
- Develop realistic expectations about timelines for returns
- Focus on long-term performance rather than daily fluctuations
- Set appropriate investment horizons based on your goals
- Understand that compound interest works best over time
I remember checking my portfolio several times a day during my first year of investing. Not only was this stressful, but it led me to make impulsive decisions based on short-term movements rather than long-term strategy.
4. Too Much Investment Turnover
Constantly buying and selling investments – what professionals call “turnover” – is another return killer. Each transaction comes with costs:
- Trading commissions
- Higher tax rates on short-term gains
- Opportunity costs of missing long-term growth
How to avoid this mistake:
- Adopt a buy-and-hold strategy for core positions
- Limit portfolio “tinkering” to quarterly reviews
- Consider tax implications before selling
- Remember that most active traders underperform the market
A study I read showed that the average investor earned just 2.6% annually over a 20-year period when the S&P 500 returned about 10% annually. The difference? Excessive trading and poor timing decisions.
5. Attempting to Time the Market
“Buy low, sell high” sounds simple, but consistently timing market tops and bottoms is nearly impossible – even for professional investors.
A famous study called “Determinants of Portfolio Performance” found that about 94% of investment returns over time come from asset allocation decisions rather than market timing or individual security selection.
How to avoid this mistake:
- Focus on regular, consistent investing regardless of market conditions
- Consider dollar-cost averaging into positions
- Maintain your target asset allocation through rebalancing
- Accept that you’ll rarely buy at the absolute bottom or sell at the perfect top
In my early investing days, I kept a large cash position waiting for a “better entry point” in 2013-2014. That market correction never came, and I missed out on significant gains during one of history’s greatest bull markets.
6. Waiting to “Get Even” Before Selling
This is a psychological trap that’s hard to escape. When an investment loses value, many investors refuse to sell until they “get back to even” – meaning the investment returns to their purchase price.
This behavior, which behavioral finance calls a “cognitive error,” can be incredibly costly.
How to avoid this mistake:
- Evaluate each investment based on future prospects, not past performance
- Ask yourself: “Would I buy this investment today at current prices?”
- Set stop-loss orders to remove emotion from selling decisions
- Remember that selling a loser can provide tax benefits through tax-loss harvesting
One of my worst investment mistakes was holding onto a failing retail stock for years because I couldn’t bear to lock in the loss. When I finally sold, the stock was worth 80% less than my purchase price – and I had missed opportunities to invest that money elsewhere.
7. Failing to Diversify
Putting too many eggs in one basket is a recipe for disaster in investing. While concentration might build wealth (just ask early Amazon or Tesla investors), it also significantly increases risk.
For most investors, diversification across different asset classes, sectors, and geographies provides the best risk-adjusted returns.
How to avoid this mistake:
- Spread investments across different asset classes (stocks, bonds, real estate)
- Within stocks, diversify across sectors and company sizes
- Consider international exposure to reduce country-specific risk
- Aim to build a portfolio where no single position exceeds 5-10% of total value
I learned this lesson when the tech bubble burst in 2000. My portfolio was heavily concentrated in technology stocks, and I watched years of gains evaporate in months.
8. Letting Emotions Rule Your Decisions
Perhaps the #1 investment killer is emotion – primarily fear and greed. When markets fall, fear makes us sell at the worst possible time. When markets rise, greed pushes us to take excessive risks.
How to avoid this mistake:
- Develop a written investment plan before market turbulence hits
- Set specific criteria for buying and selling decisions
- Consider working with a financial advisor who can provide objective guidance
- Remember that market volatility is normal and temporary
During the 2020 COVID crash, I panicked and sold some positions near the bottom. Had I stuck to my long-term plan instead of reacting emotionally, those investments would have recovered within months.
How to Avoid These Common Investment Mistakes
Now that we’ve identified these mistakes, here are some practical steps to avoid them:
1. Develop a Comprehensive Plan
- Define your investment goals and time horizon
- Determine your risk tolerance honestly
- Create an asset allocation strategy aligned with these factors
- Write it all down for reference during market turbulence
2. Put Your Investments on Autopilot
- Set up automatic contributions to investment accounts
- Implement regular rebalancing to maintain your target allocation
- Review your portfolio quarterly rather than daily
- Increase contributions as your income grows
3. Allocate a Small Amount as “Fun Money”
- Set aside a small portion (no more than 5%) for more speculative investments
- Only use money you can afford to lose completely
- Set strict rules for this portion of your portfolio
- Consider this your “learning budget” for developing investment skills
4. Educate Yourself Continuously
- Read investment books and trusted financial publications
- Follow reputable financial experts (but be skeptical of “hot tips”)
- Join investment communities to learn from others’ experiences
- Consider taking courses on investing fundamentals
Final Thoughts
Look, we all make mistakes with our money – I’ve certainly made my share! The key isn’t trying to be perfect but rather learning from errors and continuously improving your investment process.
Remember that successful investing isn’t about making spectacular gains in a short period. It’s about consistently applying sound principles over many years and avoiding major mistakes that can derail your financial goals.
By being aware of these common pitfalls and developing strategies to avoid them, you’ll be well on your way to building a portfolio that can help you achieve your long-term financial objectives.
What’s the worst investment mistake you’ve made? For me, it was probably holding onto losing positions for way too long out of stubborn pride. Share your experiences in the comments, and let’s learn from each other!
Four ways to regain discipline and patience
History tells us that the best investment approach is the simplest: do the research, choose wisely and selectively, and stay invested. This allows dividends and earnings growth to benefit from the power of compounding over time.
The reality in many cases is very different. Bombarded by fast-changing narratives and rapid swings between market outcomes that are re-shaping the investment landscape, we are increasingly seeing investors look for performance in the wrong places.
On the one hand, this is to be expected. The ups and downs in today’s new era have seen equities rise and fall, and rise again. On the other hand, the potential for volatility in the macro regime, in investment sentiment, across markets, and in geopolitical tension, will always exist.
Put simply, shortening investment time horizons to chase the possibility of marginal gains will often be at the expense of more consistent results over time.
For investors who want to avoid reacting to the “noise” by trying quick fixes which are likely to damage portfolio returns, here are four common mistakes to avoid.
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Ignore the ups and downs of markets Don’t forget, it’s about “time in” rather than “timing” the market. Selling falling stocks out of fear will just lock-in losses, especially if the quality of a company remains sound. We seldom see a bad time to buy or own a great business. It has become more urgent than ever to heed this call, with dynamics such as low economic growth and technological disruption contributing to a divergence between so-called ‘winners’ and ‘losers’ that further distorts the potential longer-term value of these same companies. |
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Don’t wait for markets to fall from all-time highs Many apparent highs tend to be followed by a newer high. As a result, investors risk missing out on significant further gains if they see an all-time high as a signal to sell a position. It’s also impossible to know when a pullback might come, how strong it will be, or how long it will last. In fact, the market might have already risen again (and moved even higher again) while a fearful investor is waiting to buy back in. |
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Don’t assume high valuations are bad or that low valuations will lead to good performance Market valuations get too much attention among investors, especially since valuations are mean reverting. It is fundamentals, such as earnings growth, that dictate returns in the long run. The BlackRock Global Unconstrained Equity (GLUE) Fund takes this into account. Its aggregated valuation has seen many meaningful short-term moves, sometimes leaving its price-to-earnings ratio below what it was at launch, despite the Fund being well up overall. In GLUE’s case, this shows the Fund is not expensive versus its history, and that business fundamentals have driven its performance, not a re-rating. |
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Avoid being influenced by the “sticky inflation” narrative While the macro regime remains a hot topic, it appears that pressure is easing. In turn, inflation is becoming less of a focus in earnings calls. In line with this, more attention should be on real-world fundamentals and sustainable earnings power. |
Putting market fears and other dynamics aside, the sustainability of a company’s returns and the scale of its reinvestment opportunity over the long term is based on performance. Its quality will stand the test of time, whereas sticking to what’s popular will more likely distort the longer-term outcome.
Such resilience is a must-have when investing in the current volatile environment. It is more common at the moment in companies that offer defensive earnings and cash flow streams.
Ultimately, this reflects the importance of having conviction in great companies with deep moats, while keeping focused on the fact that concentration doesn’t necessarily equal higher risk – especially over the long term. The way forward? An approach that can invest where the best opportunities exist, unconstrained by geography or sector.
4 Common Investment Mistakes To Avoid
FAQ
What are the biggest investment mistakes?
- Lacking a clear financial plan. …
- Misunderstanding true risk tolerance. …
- Failing to diversify and rebalance. …
- Trying to time the market. …
- Chasing performance.
What are the 4 P’s of investing?
Investing is a life long journey requiring you commit your hard earned money and placing your trust on a capable partner. This is where the 4 Ps – Processes, Policies, People and Philosophy can guide you to make effective decisions when it comes to mutual fund investments.
What is the 7% rule in investing?
The 7% rule refers to a stop-loss strategy commonly used in position or swing trading. According to this rule, if a stock falls 7–8% below your purchase price, you should sell it immediately—no exceptions.
What are the 5 mistakes every investor makes summary?
In it, he covers the five mistakes that every investor makes and provides solutions on how to avoid them. The five mistakes are market timing, active trading, misunderstanding performance and financial information, letting yourself get in the way, and working with the wrong advisor.