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Wednesday, August 10, 2011

10 Common Mistakes People Make When Investing

10 Common Mistakes People Make When Investing

Almost everyone makes investment mistakes. Yet, these mistakes may benefit us in the future, as we utilize our knowledge to make better and more informed business and investing decisions even if they cost us money the first time around.

Like the advices from our parents, we must often experience it ourselves before we truly learn from them. However, if we know about our tendencies before we make them, it is much easier to recognize the problem and learn from it.

Here are 10 common mistakes that people make when it comes to investing.

1. Blinded by Reward
Being blinded by the possible rewards of an investment can lead us astray when it comes to the associated risk of that same investment. Hearing others speak of amazing dividends, huge returns, and immense profit taking can leave us chomping at the bit to jump into an investment without considering the risks involved. 

You must often step back for a moment and consider just why the payoffs are so high for a particular investment, and then decide whether the risks of such payoffs are worth what might only be a fleeting reward.

2. Impatience
Impatience has been the killer of many wise investments. Not waiting out a downturn in the economy or assuming a stock has seen its prime and selling it too soon, even though it’s a well-known and stable investment, could leave you with regrets.

As an example, one investor (he shall remain nameless for the purposes of this article) was once invested in Hilton Hotel Corporation stock. This same investor had bought his shares at $10. When the stock reached $14 and stabilized for several months, the investor lost faith even though he knew the stock was a rock solid investment.

He didn’t need the money, but became inpatient and dumped the stock, took his profits and several years later Hilton was bought out, their stock selling for over $40 a share. Impatience got the better of him and he lost out big time.

3. Missed the Train
Missing the train when it comes to a hot investment can leave you frustrated and angry that you didn’t get on board with everyone else. 

Rather than chalking it up to a learning experience and looking for a new investment, you may decide to chase the train and jump on just as everyone aboard is jumping off. This can leave you holding the bag while others are taking their profits.

4. Bubble Bursting
A bursting investment bubble can leave a lot of people losing a lot of money. Not seeing the fall of a particular investment or investment area in time can leave you in a precarious position. During the last decade, areas such as real estate and technology have shown us just how dangerous bursting bubbles can be.

When people start saying an investment is fail-safe or bound to make you money, it’s a good idea to start questioning the soundness of such advice. Remember the old adage, “If it sounds too good to be true, it probably is.”

5. Influence of the Masses
It can be easy to get caught up in the excitement of an investment. When everyone around you is telling you how great a particular investment is and how much money they are making off of it, it can be difficult to ignore the opportunity. 

However, as with bursting bubbles, that same herd of charging cattle that leads you to water can lead you off the side of a cliff when it comes to your investment decision. Listening to the masses rather than your own good sense (i.e. housing bubble, tech bubble) could be an investing mistake you’ll kick yourself over down the road.

6. Taking Investing Personally
Sure, it might seem like big business is out to get you and the oil companies raise gas prices every time you head to the pump to fill up your car, but taking investing personally can be a big mistake. Making investment decisions based upon personal preferences or because you’re angry about losses may only leave you angrier because you didn’t base your decision on factual information and sound investing practices.

7. Uncomfortable Investments
Some people find that they are unable to stop thinking about their investments because they are worried about losing money. Even though their investment decisions may be good ones, they are unable to stop fixating on the investments and lose sleep over the fact that their money is at risk. 

Sometimes investments just aren’t worth the fear that comes with them and for some people certain risk-involved investments may be considered a mistake due to the loss of peace of mind they are suffering.

8. Heightened Expectations
Heightened expectations of investment returns can result in poor decisions. Often influenced by Wall Street analysts or our financial advisors, many are no longer satisfied with four or five percent returns on their investments. 

Heightened expectations due to constantly being led to believe returns of eight, nine, or ten percent are a regular occurrence can lead to skewed decision-making regarding where and how money is invested.

9. Low Capital Investments
Sometimes it’s not that we don’t make the correct decisions, but when we do, we don’t put enough money into the pot to make the decision worthwhile.

Purchasing 10 shares worth of stock when the stock price is $10 a share, even if the investment takes off, might not make a significant difference in your overall portfolio.

10. Investing Before Debt is Reduced or Eliminated
Sometimes we make the mistake of putting the cart before the horse in our investing. By making investments, even if they result in higher returns, before reducing or eliminating debt, means taking a much higher risk than necessary. 

Even if a particular investment returns 10% annually, if you are paying credit card interest on a similar amount at 20%, your investment choice might not be a wise one.

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