Every investor makes mistakes. The keys to being a great investor, however, are 1) realizing when you're doing something wrong, and 2) fixing it.
The best time to look at how you're doing with your investing is when the markets are weak. During bull markets, your portfolio will often do well no matter what you do. But that doesn't mean you're the world's best investor -- and when the inevitable downturn comes, it can reveal all sorts of problems with your investments.
So with that in mind, here are a few mistakes you may be making right now.
1. More is not better.
Many investors put together their stock portfolios the same way they'd build a coin collection. Whenever they see a company that interests them, they buy a little and set it aside, hoping that eventually it'll turn into a gold mine.
These investors are particularly susceptible to hot sectors. They'll often buy overvalued stocks at exactly the worst time. For instance, Internet companies like Yahoo! (Nasdaq: YHOO ) and Amazon.com (Nasdaq: AMZN ) have done very well in recent years. But if you bought them in 1999 at the height of the boom, you might still be underwater on those stocks despite their strong returns lately.
It's important to have a diversified portfolio. But that doesn't mean you have to hold onto every stock you ever buy. If you're holding more than 15 stocks, you need to ask yourself three things:
- Do you believe every stock you own will outperform the average stock?
- Do you have the time to follow each company on an ongoing basis?
- Do you really like all your stocks equally well?
If the answer to any of these questions is no, then you'll likely get better results with a smaller stock portfolio.
2. You're watching your stocks too much.
When the market's sliding, it's hard to keep your eyes off the ticker feed. That leaves you vulnerable to the whims of your emotions -- in both directions. When your stocks fall, you're more likely to panic and sell at bargain-basement prices, locking in a huge loss. On the other hand, even if you've got stocks that do hold up, it can be tempting to try to lock in profits -- and potentially miss the bigger gains that come with long-term investments.
Whether you've got blue-chip holdings such as ExxonMobil (NYSE: XOM ) and Wal-Mart (NYSE: WMT ) , or a small-cap speculative stock like Vail Resorts (NYSE: MTN ) , day-to-day price changes in your stocks aren't important. In fact, they're likely to distract you from what's really essential: choosing companies that will perform well over the long haul. So if you trade too much -- or even think about trading frequently -- then you owe it to yourself to take a break from your instant price quotes and take the big-picture approach.
3. Don't stop believing.
Market uncertainty can give even the most experienced investors pause. Taking a break from adding money to the market can seem like the smartest move you can make -- especially when you look at the short-term losses you would've had if you'd kept buying shares.
In the long run, however, interrupting your regular investment plan is the worst thing you can do. While it's hard to realize this when you're in the middle of a downturn, money you invest right now will have a much better long-term return than the investments you make when markets are trading at highs. Consider this: Back in 2002 hardly anyone wanted to hold oil services stocks like Schlumberger (NYSE: SLB ) and Dawson Geophysical (Nasdaq: DWSN ) . Yet those who kept buying have been richly rewarded.
So don't stop buying stocks when the markets aren't doing well. In fact, think about upping the amount you buy to take advantage of cheap stocks.
Don't be too disappointed when you make mistakes with your investments -- it's all part of the lifelong on-the-job education you get as an investor. If you don't learn from those mistakes, though, then you'll be doomed to keep repeating them.
For more tips on how to avoid investing mistakes, read: