Jamie joined Citizens Wealth Management in 2022 and is responsible for the curation and management of the investment product suite of ETFs and Mutual Funds, and portfolio models constructed with these products. As a strategic partner, he has over 30 years of experience in financial markets focused on a broad array of public and private equity and fixed income products.
Legendary investor Benjamin Graham said, “The investors chief problem, even his worst enemy, is likely to be himself.”
Successful investing involves knowing yourself and your finances, having discipline and staying updated on research and trends. It also involves understanding how you could improve your approach. You may be doing well investing on your own, but theres always room to reflect, adjust and optimize so that youre doing even better.
Here are eight of the most common investing mistakes to watch out for when managing your own portfolio so you can spot where to make improvements.
Are you diving into the stock market with dreams of financial freedom? WAIT! Before you jump in headfirst, let’s talk about what you should NOT do when investing in stocks. I’ve seen too many eager investors make the same costly mistakes over and over again. Trust me, I’ve made some of these blunders myself!
In today’s article, I’ll share essential wisdom about the dangerous pitfalls that can destroy your investment portfolio. We’ll explore common mistakes that even experienced investors make and how you can sidestep these traps for better financial outcomes.
1. Don’t Invest Without a Personal Financial Roadmap
One of the biggest mistakes you can make is jumping into the stock market without a clear plan I remember when I first started investing – I was buying stocks based on hot tips from friends without considering how they fit into my overall financial goals!
What to do instead
- Sit down and take an honest look at your entire financial situation
- Figure out your specific goals (retirement, college fund, home purchase)
- Determine your risk tolerance – how much loss can you handle emotionally?
- Consider working with a financial professional if needed
Having a financial roadmap isn’t just smart – it’s essential. Without one, you’re essentially gambling rather than investing.
2. Don’t Ignore Your Risk Tolerance
Many new investors dive into high-risk investments without understanding their personal comfort level with potential losses,
Here’s the reality: ALL investments involve some degree of risk. The money you put into securities like stocks, bonds, or mutual funds isn’t federally insured. Unlike FDIC-insured bank deposits, you could lose your principal investment in the stock market.
The classic risk-reward tradeoff applies:
- Higher risk investments = Potential for higher returns
- Lower risk investments = Usually lower returns
But here’s the kicker – if you invest in something that keeps you up at night with worry, you’re likely to make emotional decisions that hurt your returns.
3. Don’t Put All Your Eggs in One Basket
I’ve seen it happen too often – someone gets excited about a particular stock (often their employer’s) and invests everything they have into it. Then disaster strikes when that single stock tanks.
One of my colleagues had 90% of his portfolio in his employer’s stock. When the company faced a scandal, he lost nearly everything! Don’t let this happen to you.
The solution: Diversify, diversify, diversify! This means:
- Spreading investments across different asset classes (stocks, bonds, cash)
- Investing in multiple sectors within those asset classes
- Considering different geographic regions
When you diversify, market conditions that cause one investment to perform poorly might cause another to do well, helping to smooth out your returns.
4. Don’t Invest Emergency Money in Stocks
This mistake can lead to financial disaster. The stock market is NOT the place for your emergency fund!
Smart investors maintain a separate emergency fund that covers 3-6 months of living expenses. This money should be kept in easily accessible savings accounts or cash equivalents, not in volatile stocks.
Why? Because when emergencies happen (job loss, medical issues, car repairs), you need access to funds immediately – without having to sell investments at potentially terrible times.
5. Don’t Invest Money You Need Soon
Similar to the emergency fund issue, don’t invest money in stocks that you’ll need in the near future.
If you’re saving for a down payment on a house you plan to buy in 6 months, the stock market is TOO RISKY for those funds. Market downturns can happen anytime, and you don’t want to be forced to sell investments at a loss just because you need the cash.
General rule of thumb:
- Money needed within 1-2 years: Cash or cash equivalents
- Money needed in 3-5 years: Conservative mix of stocks and bonds
- Money needed in 6+ years: More aggressive investments possible
6. Don’t Skip Paying Off High-Interest Debt First
Listen up! There is NO investment strategy anywhere that pays off as well as, or with less risk than, simply paying off high-interest debt.
If you’re carrying credit card balances with 18% interest, but hoping to make 8-10% in the stock market, you’re making a serious mathematical error. You’ll come out behind every time!
Pay off those high-interest debts before investing significantly in stocks. It’s guaranteed “return” on your money.
7. Don’t Try to Time the Market
Oh boy, market timing is the siren song that lures many investors to their doom. I’ve tried it myself – thinking I could predict market tops and bottoms. Spoiler alert: I couldn’t, and neither can professional fund managers with all their resources.
Attempting to time the market often leads to:
- Missing out on the market’s best days
- Higher transaction costs and taxes
- Stress and emotional decision-making
Better approach: Consider dollar-cost averaging – investing a fixed amount regularly regardless of market conditions. This strategy helps reduce the impact of volatility and removes the emotional component from investing.
8. Don’t Chase Past Performance
I see this ALL the time – investors piling into last year’s hottest stocks or funds, only to be disappointed when performance doesn’t repeat.
Remember this critical investment truth: Past performance does not guarantee future results.
Just because a stock or fund performed amazingly last year doesn’t mean it will continue to do so. In fact, studies show that top performers in one period often underperform in subsequent periods.
Focus instead on:
- Quality companies with good fundamentals
- Reasonable valuations
- Strong management teams
- Sustainable competitive advantages
9. Don’t Neglect to Rebalance Your Portfolio
Many investors set up their portfolios with an ideal asset allocation and then… forget about them completely! Over time, as different investments perform differently, your portfolio can drift from your target allocation.
For example, if stocks perform really well for several years, your portfolio might become more heavily weighted toward stocks than you intended, increasing your risk exposure.
Solution: Rebalance your portfolio periodically (every 6-12 months) to maintain your target asset allocation. This forces you to “buy low and sell high” by trimming investments that have grown and adding to those that have underperformed.
10. Don’t Let Emotions Drive Your Investment Decisions
Fear and greed are the two emotions that destroy more investment portfolios than anything else. When markets plunge, fear makes us want to sell everything. When markets are soaring, greed tempts us to pile in more money.
Both reactions usually lead to poor outcomes.
I remember back in March 2020, when markets crashed during the early pandemic days. Many investors panicked and sold at the bottom, missing the incredible recovery that followed.
Successful investing requires discipline and emotional control:
- Stick to your investment plan during market volatility
- Make decisions based on fundamentals, not headlines
- Consider working with an advisor if emotions are overwhelming
11. Don’t Ignore Fees and Taxes
The silent killers of investment returns! High fees and taxes can drastically reduce what ends up in your pocket.
Be aware of:
- Management fees for mutual funds and ETFs
- Transaction costs when buying/selling
- Account maintenance fees
- Tax implications of investment decisions
Even a 1% difference in annual fees can reduce your retirement balance by hundreds of thousands of dollars over decades of investing.
12. Don’t Fall for Get-Rich-Quick Schemes
If an investment opportunity sounds too good to be true, it probably is! Scam artists are always looking for ways to separate investors from their money.
Be especially cautious of:
- Promised “guaranteed” returns
- Investment opportunities pushed through unsolicited communications
- Pressure to “act now” or miss out
- Complicated strategies you don’t fully understand
Always do your homework and ask questions before investing. Check with trusted sources and regulatory authorities if something seems suspicious.
13. Don’t Forget to Take Advantage of “Free Money”
Many employers offer matching contributions to retirement plans like 401(k)s. If you’re not contributing enough to get the full match, you’re literally leaving free money on the table!
For example, if your employer matches 50% of your contributions up to 6% of your salary, you should try to contribute at least 6% to get the full match.
This is literally an immediate 50% return on your investment – something you won’t find anywhere else!
Final Thoughts: What You SHOULD Do
Now that we’ve covered what NOT to do, let’s quickly summarize what you SHOULD do:
- Create a clear investment plan aligned with your goals
- Understand your risk tolerance
- Diversify across different asset classes
- Maintain an emergency fund separate from investments
- Pay off high-interest debt before heavy investing
- Use dollar-cost averaging instead of market timing
- Focus on quality and value, not past performance
- Rebalance periodically to maintain your target allocation
- Control your emotions during market volatility
- Minimize fees and tax impacts
- Verify investment opportunities before committing
- Take advantage of employer matching in retirement accounts
Remember, successful investing isn’t about getting rich quick – it’s about consistently making smart decisions over time that help you build wealth and achieve your financial goals.
Have you made any of these investing mistakes? What lessons have you learned from your own investing journey? I’d love to hear your thoughts in the comments below!
Until next time,
Your friendly financial blogger
Trying to time the market
Trying to time the market by buying low and selling high is notoriously difficult. If you frequently buy and sell based on short-term market volatility, you may incur higher transaction costs and can miss out on long-term gains. In fact, research indicates that some of the largest stock market gains have occurred after big declines1, meaning that if youre out of the market during the top-performing days, your long-term returns could be significantly reduced.
Like market timing mistakes, it can be tempting to chase recent top-performing investments or follow the crowd without conducting research. When you know the background or have someone with experience on your side, you can better recognize when assets seem overpriced and likely to end up being underwhelming because its what everyone else is doing.
Youll be much more empowered if you know what youre putting your money into, understand the trends of those assets and have a long-term plan thats built to withstand market movement.
Making emotional decisions
Emotional reactions to market fluctuations or expecting but not receiving immediate results can lead to impulsive decisions. Investing successfully is often a long-term endeavor that can test your endurance, and it can be difficult to stay impartial. On the opposite side of this, you may become so attached to an investment — or mistakenly believe youll recover your sunk cost — that you hold on to it for too long.
Its important to have realistic expectations, remain logical about investments and know when and who to ask for advice.
Investing Mistakes – Why Beginners Lose Money in the Stock Market
FAQ
What is the 3-5-7 rule in stocks?
What is the 7 3 2 rule?
The “7-3-2 rule” most commonly refers to a financial strategy for wealth building, not a single concept. It suggests a goal of saving your first crore (10 million rupees) in 7 years, then your second crore in 3 years, and your third crore in 2 years, leveraging compounding and disciplined investing. It can also refer to a trucking industry regulation for splitting mandatory driver breaks or a rule of thumb for estimating investment needs.