8 Common Investing Mistakes

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No one is a perfect investor. Even the world's most-respected investors have confessed to making errors.

In various annual letters, Warren Buffett has told his shareholders: "You'd have been better off if I had gone to the movies [this year]" and "I have erred [by] not making repurchases [of shares]." In 2004, when asked at the Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) annual meeting what his worst investing mistake was, he explained: "I set out to buy 100 million shares of Wal-Mart (NYSE: WMT) at a [pre-split price of] $23. ... We bought a little and it moved up a little and I thought maybe it will come back a bit. That thumbsucking has cost us in the current area of $10 billion."

Here are some other common mistakes investors make. Avoiding the ones that apply to you can considerably boost your ultimate performance.

Accumulating credit card debt
It feels like free money, but it isn't. High interest rates increase your debt, making it harder and harder to pay off. That's reverse investing! If you're mired in debt, you won't even have a chance to make many of these other mistakes!

Not investing soon enough
You're rarely too young (or even too old) to invest. Kids have the most to gain from many decades of stock appreciation. But even retirees can benefit from leaving whatever money they won't need for five or 10 years in stocks. Folks of all ages can benefit mightily from a free trial to The Motley Fool's Rule Your Retirement newsletter service, which can help you set yourself up for a very post-work life.

Investing too conservatively
In general, long-term investments will do better in the stock market. The long-term annual average return for the stock market over the past century is around 10%. You may do better or worse than that in the years that you invest, of course. But if you save for your retirement solely with bonds or CDs, or even real estate, you may find that you've underperformed needlessly in the long run.

Having unrealistic expectations
What return do you expect from your stocks? 20% per year? 30%? Well, snap out of it. Even Apple (Nasdaq: AAPL) has averaged less than 16% per year over the past 20 years, and it's head and shoulders above most other companies.

Sure, some companies sustain big returns for a long time. Wal-Mart has averaged an annual return of around 23.5% since 1979. Then there's Best Buy (NYSE: BBY), which would have increased your investment more than 150-fold over the past 20 years -- just under 29% annually, on average. But those are exceptionally unusual cases.

Expect an average of 10% annually from the stock market over long periods. To be conservative, be prepared for that average to sink a bit lower during your personal long-term investing period.

Over- or under-diversifying
If all your eggs are in two or three baskets, you're exposed to too much risk. Just imagine if you'd had much of your moola in Enron. Or even struggling companies like AIG (NYSE: AIG) or Fannie Mae (NYSE: FNM), both down more than 95% from their 1999 prices. On the other hand, if you have too many baskets to count, then you probably aren't able to keep up with each company. Between eight and 15 stocks is a manageable number for most people, although some do well with a few more or less.

Holding on too long
Why did you buy a given stock? Are the reasons still valid? Has anything important changed? Have you gained as much as you expected? These are the sorts of questions you should mull over regularly. Be prepared to sell under certain circumstances, whether you've made or lost money so far.

Paying too much in commissions
Aim to pay no more than 2% per trade in commissions. So if you're buying $500 of stock, you'll want to pay $10, tops, for the trade. Fortunately, there are plenty of brokerages with modest commission fees; learn more about them in our brokerage area.

Letting emotions rule your investing
Don't be led by fear, which can have you jumping out of the market just when stocks have fallen, or greed, which can have you hanging on to an overpriced winner, hoping to eke out a few more dollars of gain. Similarly, don't stubbornly hang on to a loser, hoping to make back your lost dollars, when you could be selling and buying shares of a company in which you have far more confidence.

Are you ready for the next crash? John Rosevear knows when it's going to happen -- find out how to prepare today.