When it comes to investing, it’s a journey of trial and error, or it’s about gaining wisdom from the blunders of others. Explore the top 10 intermediate investing mistakes in this article.
The Context
Your best teacher is your last mistake — Ralph Nader
Now that you have set up your Demat account, it’s time to explore beyond fixed deposits and mutual funds.
You’ve crossed the threshold from a casual observer to an active participant in the investing world, willing to dedicate time each month to analyze investment opportunities, scrutinize financial data, and make informed stock picks.
Your passion for investing is so intense that you love discussing it with your loved ones, even if they don’t understand the jargon. With all these efforts, you have officially earned your place as an intermediate investor. Congratulations!
Just as we discussed the most prevalent mistakes made by novice investors, below is a compilation of intermediate investing mistakes that are frequently encountered during this phase of your investing journey.
1. Ignoring Asset Allocation
Investing in stocks can be an exciting and transformative experience for any investor, but it’s crucial to keep a level head amidst the excitement. While playing around with finance apps and obsessing over stock charts may seem like harmless fun, it’s important not to neglect the crucial process of asset allocation.
Balancing risk and returns through the distribution of investments across different asset classes is key to constructing a solid portfolio that aligns with your risk tolerance and financial goals. Stock selection is just one small piece of the puzzle.
2. Trying To Time The Markets
All individuals have a tendency to think they are smarter than other people, which causes an interesting phenomenon called “Hindsight Bias,” according to behavioral economics.
In other words, the “I knew it all along” feeling. This occurs when our brain interprets past experiences and assumes that future events will follow a similar linear pattern. As a result, we frequently believe that we can time the market. Keep in mind that market valuations represent the consensus of millions of individuals, each of whom is influenced by their own unique bias.
Markets are thus a Level 2 Chaos (see Edward Lorenz’s Chaos theory), so every significant, wise, or crazy prediction and judgment is already taken hold of resulting in an unpredictable outcome. Timing markets constantly is therefore useless.
The suggested approach for being a profitable investor is to shrewdly synchronize and capitalize on the ongoing directions of the market. Decent profits hence can be easily achieved by taking advantage of broad and highly predictable biases expressed by many uninformed and overconfident investors out there.
3. Following Herd Mentality
In our view, one of the most prevalent investing errors is the tendency to follow the crowd rather than relying on one’s own instincts and research. This pack, mob, or gang mentality has resulted in irrational market rallies and sell-offs, frequently lacking fundamental support.
As herd animals, we have an innate tendency to conform to social cues and align our actions with those around us, but this inclination can lead to costly investment blunders. The dot-com bubble of the late 1990s and early 2000s is a prime example of the effects of herd mentality on the rise and fall of a stock market frenzy.
Therefore, it is always a good idea to conduct thorough research before making investment decisions and to base them on reason rather than irrational emotions.
4. Relying On The Wrong Advisor
Making well-intentioned bad decisions is still not a good choice, and this applies to working with financial advisors as well. Choosing the wrong advisor can jeopardize your entire life’s savings, so it’s essential to be cautious. Look out for the following red flags that indicate you may have picked the wrong advisor:
≡ How are they compensated? If it’s solely through commissions, it could lead to a bumpy ride.
≡ Are they charging excessive fees? If the charges aren’t justified, you need to ask why.
≡ Do they provide well-documented individualized plans that align with your objectives? If not, they’re not serving your best interests but merely satisfying your desire to be content.
≡ Do they suggest buying and selling frequently? If so, it shows they lack confidence in their decisions, leading to increased taxes and fees.
≡ Always choose an advisor who acts solely in your best interest.
≡ Opt for fee-based or fee-only advisors to ensure there are no other conflicts of interest besides the fee you’re required to pay as a client.
5. Trusting Le’ Professionals
You are not alone in this situation! This well-known quote by Norman Ralph is quite fitting: “If stock market experts were so expert, they would be buying stock, not selling advice.” Investment institutions and many “professionals” have a stake in managing your money, as this allows them to charge fees and earn commissions. There are no free lunches in the world of finance.
Reliance on a “professional” opinion may limit your ability to think independently. The only way to overcome this is to become financially literate and take charge of your finances. You can take the first step by enrolling in our free Stock Investing course.
Remember to always consider an “expert’s” motives before blindly accepting their advice. Ask if they have a legal “FIDUCIARY” obligation, which means they are obligated to act only in the best interests of their clients and no one else.
6. Unnecessary Diversification
Excessive diversification can be detrimental to your investment portfolio, much like how consuming too much sugar can be harmful to your health.
The term “DIWORSIFICATION” has been coined to describe the practice of adding investments to one’s portfolio in a way that worsens the risk/return trade-off, as explained in Peter Lynch’s book, “One Up On Wall Street” (1989).
This mistake is made by reckless investors who purchase as many equities and asset types as possible, resulting in a portfolio that is overly diversified, similar to a buzzing beehive. As a result, the risk/return trade-offs become unfavorable, and moderation is lost.
While it is important to diversify your risks, it is also important not to overdo them, as too many investments can obscure your view.
7. Listening To Noise Peddlers
The knowledge we consume shapes who we are, and the same holds true for the information we take in.
In today’s age of social media, opinions spread rapidly like wildfire. This has created a fertile hunting ground for noisemakers and syndicates posing as experts. Their antics lure many unsuspecting investors, causing them to lose sight of their objectives. An opinion unsupported by any evidence is simply worthless.
To put it bluntly, “it’s crap.”
It’s best to avoid becoming a commodity in the flood of spam emails, speculative media opinions, and institutions that incessantly throw their trash into the social media stream. Remember to rely on your abilities, sound evidence, and survival instincts to make investment decisions that make sense.
8. Believing You Have To Beat Mr. Market
Avoid thinking of beating Mr. Market as a measure of success since you’re not in a war against him. Research suggests that 95% of individual investors and 89% of professional fund managers consistently underperform in the market.
However, there is a small percentage of people who outperform the market, but the mental and moral cost is often too high unless you are a full-time professional investor. The consequences usually include sacrificing significant aspects of normal social life in pursuit of speculative opportunities. Keep in mind that YOU are the most valuable asset in this game.
Your life and goals should be tailored to work for you, not the other way around. Your success should be measured by how well you achieve your life objectives with discipline and enjoyment, not by how much you outperform the market.
9. Looking For Patterns In Everything
Pattern recognition was crucial for survival in ancient times, enabling people to identify potential threats, food sources, and mates. As a result, our brains have become wired to seek patterns in seemingly random data, a phenomenon known as pareidolia in psychology.
Examples of pareidolia include seeing religious figures in the clouds, loved ones’ faces in a piece of toast, national flags carved into animal fur, and demonic shapes in stone.
Investors are often motivated by the emotions of fear and greed, leading them to seek patterns even when none exist. This can result in the erroneous practice of finding skewed patterns in almost anything, which is a major mistake in investing.
While there are roughly 17 chart patterns that traders can use to manage their strategies, academic research suggests that “less is more” when it comes to long-term investing. It’s important to remember that value investing is not a party but a straightforward investment strategy.
10. Paying Too Much In Fees & Commissions
Think of fees and commissions as essential nutrients in your investment strategy. Just as you need vitamins and minerals in the right amount to stay healthy, fees and commissions are necessary for moderation to keep your investments running smoothly. However, excessive fees and commissions can be harmful, and they are one of the most expensive investment mistakes you can make.
Even a seemingly small fee of 1 percent can significantly eat into your gains over time, especially if you let it accumulate unchecked for years. Keeping investment costs low is essential for long-term success because the more fees you pay, the less your return you get to keep, which can reduce your portfolio’s growth potential.
Here are some simple strategies to ensure that your investment costs remain under control:
☑ Opt for individual stocks instead of closed-end funds
☑ Avoid mutual funds with high expense ratios
☑ Verify exit loads or commissions
☑ Evaluate advisory fees
☑ Choose the most cost-effective discount brokers
☑ Avoid trading without proper experience
☑ Only churn your portfolio if necessary
☑ Be mindful of taxes and stamp duties when buying and selling financial instruments
That concludes our list of the Top 10 Intermediate Investing Mistakes.
Frequently Asked Questions (FAQs)
1. What is asset allocation, and why is it important for investors?
Asset allocation involves distributing investments across different asset classes to balance risk and returns. It’s crucial for constructing a diversified portfolio aligned with your financial goals and risk tolerance, helping to mitigate potential losses.
2. Why is trying to time the markets considered a mistake?
Timing the markets is challenging and often driven by hindsight bias, leading investors to believe they can predict future market movements based on past performance. However, markets are inherently unpredictable, making timing strategies unreliable and risky.
3. How does herd mentality impact investment decisions?
Following the crowd without conducting thorough research can lead to irrational investment decisions based on emotions rather than logic. Herd mentality can result in market bubbles and crashes, highlighting the importance of independent thinking in investing.
4. What should investors consider when selecting a financial advisor?
Investors should assess how advisors are compensated, watch for excessive fees, ensure personalized investment plans align with their goals, and prioritize advisors who act in their best interests. Choosing the right advisor can significantly impact investment outcomes.
5. Why is unnecessary diversification considered a mistake in investing?
While diversification is essential for managing risk, excessive diversification, or “diworsification,” can dilute portfolio returns without providing significant risk reduction. It’s important to strike a balance between diversification and maintaining a focused investment strategy.
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