Last week I reviewed eight common investing mistakes. Now I'm back with a few more because this is just such a rich topic, and, unfortunately, I'm familiar with mistakes, having made many of them myself. The more mistakes you learn about, the more you may be able to avoid and thereby boost your portfolio's ultimate performance.
Without further ado, here are 12 more mistakes:
Focusing inordinately on a stock's price. Contrary to popular opinion, a "cheap" stock isn't a bargain. Penny stocks -- those trading for less than $5 per share -- are risky and dangerous. A $150 stock can actually be a bargain, and if your funds are limited, you can always buy just a few shares. Some analysts, such as Warren Gump, like Washington Post
(NYSE:WPO)shares right now, and they're trading for around $800 per stub! Berkshire Hathaway shares, too, at more than $2,900 apiece, are also considered undervalued by many.
Investing in what you don't understand. The more familiar you are with how the companies you invest in work and how well they're performing, the fewer unpleasant surprises you're likely to encounter.
Not following through. I've done this myself, sending money to my brokerage account but forgetting to actually invest it. A similar error would be drafting a list of stocks you want to buy at the right price, but then not referring to it regularly, waiting for the opportunities to happen. I've done this, too; I missed a chance to snap up shares of Stock Advisor pick Starbucks
(NASDAQ:SBUX)when they fell a bit last year.
Buying and selling too often. Business professors Terrance Odean and Brad Barber studied the trading activity of more than 66,000 individual investors from 1991 to 1996. They divided the investors into five groups based on trading frequency and found that the most frequent traders trailed the least active group in performance by about 5.5% per year. You need to buy carefully, have conviction about your purchases, and aim to hang on for a while.
Ignoring the power of
dividends. Rex Moore offered some eye-opening statistics in a recent article, referring to research by Wharton Business School professor Jeremy Siegel: "During his study period of 1871 to 2003, [Siegel] found that '97% of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3% comes from capital gains.'" Read this Nathan Parmelee article to appreciate how Johnson & Johnson's
(NYSE:JNJ)dividends can do amazing things over time. And for some recommendations of healthy, growing dividend payers, take advantage of a free trial of our Motley Fool Income Investor newsletter -- you'll be able to access all the picks, which were recently averaging a dividend yield near 5%.
Impatience. Remember that building great wealth takes time. See the error above. Have a long-term view. Don't chase short-term results.
Overconfidence. It's true that many of us are under-confident, but another big swath of investing humanity (men more often than women) is overconfident. (Behavioral economists have noted that some 90% of drivers think their driving skills are above average.) Don't think that one terrific performer in your portfolio means you're a genius. Don't assume that a short-term bonanza means you'll be a long-term winner. Always keep learning.
Relying too much on the advice of others -- especially via "hot" tips. It's great to learn and get ideas from others, but ultimately you should make your own decisions. You're the one who cares the most about your finances.
Not tracking your returns. Shrug off this duty at your own peril. You always want your investment returns to be (in the long run) beating a benchmark or market average such as the S&P 500. Otherwise, you might as well meet it by investing in an index fund. You can beat the market average with carefully selected stocks, or with top-notch mutual funds.
Buying into what doesn't interest you. I've done this many times. I owned Sun Microsystems
(NASDAQ:SUNW)for a while, without really understanding how the company made its money. I saw words like "servers," "enterprise solutions," etc., and my eyes glazed over. I had high hopes for the stock, of course, but they weren't founded on a good grasp of the company's business model and competitive advantages. When the annual report arrived, it put me to sleep -- this is not a great way to be in a relationship with a company. Seek out firms that excite you, ones with annual and quarterly reports you look forward to receiving and reviewing.
Losing sight of price or quality. Too many investors invest in terrific companies, but at lousy prices, or in lousy companies at terrific prices. If you hold out for those relatively few opportunities to invest in terrific companies at terrific prices, you'll stand a greater chance of doing well. Consider fiber optic specialist Corning
(NYSE:GLW). Many would agree that it's performing quite well, but it trades at a P/E ratio north of 70 and has more than doubled over the past year. Maybe it's gotten ahead of itself for now, although Motley Fool Inside Value analyst Philip Durell suggests it hasn't. Then there's General Motors (NYSE:GM). It might look attractive, with a dividend yield recently around 4.4%, but that would have been around 8.8% a little while ago -- before the company slashed its dividend in half. The stock is trading well below its 52-week peak, but that doesn't mean it can't fall much further if the company doesn't turn itself around.
- Not looking at the big picture. Sure, your main brokerage account may have $50,000 in it. But remember the equity you've built in your home. Perhaps that adds another $100,000 to your net worth. And don't forget your 401(k) at work, either. It's useful to combine all of these to see just how diversified you are (or aren't).
Perhaps the worst mistake is never taking the time to learn about investing. You're not making that one, though, if you're reading and thinking about investing here at The Motley Fool and elsewhere!
And by the way, if stuff like this makes your head hurt and you'd like an actual person (a financial pro, no less) to talk to about your financial situation, look into our TMF Money Advisor. It's a valuable service we're offering, featuring customized independent advice from a variety of objective financial experts. You need to make sure you're saving enough and well enough to meet all your needs.
Selena Maranjian 's favorite discussion boards include Book Club , The Eclectic Library, Television Banter, and Card & Board Games. She owns shares of Washington Post and Johnson & Johnson. For more about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.