None of us are perfect as investors. Even the most respected investors out there have admitted that they've made errors. As Warren Buffett has told his shareholders in various annual letters: "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:BRKa) 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 we make. See how many apply to you, and try to avoid them -- doing so can boost your ultimate performance considerably.
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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! (Learn how to be smart about credit in our Credit Center.) If you're mired in debt, you'll hardly be in a position to invest -- so you won't even have a chance to make many of these other mistakes!
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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 test-driving -- for free -- our Rule Your Retirement newsletter service, which can help you set yourself up for a very happy second half of your life.
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Investing too conservatively. Long-term investments, in general, 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, of course, do better or worse than that in the years that you invest. But if you save for your retirement just with bonds or CDs or even real estate, you may find that you've underperformed needlessly in the long run.
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Having unrealistic expectations. What do you expect from your stocks? 50% per year? Well, snap out of it. Even Microsoft (NASDAQ:MSFT) has averaged about 30% per year over its history, and it's head and shoulders above most other companies. Then there's Wal-Mart, which would have increased your investment more than 900-fold over the past 30 years -- which is about 26% annually, on average. Expect an average of 10% annually from the stock market over long periods. More realistically, expect anywhere from 8% to 12%, on average, during your personal long-term investing period.
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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 stalwarts such as Eastman Kodak (NYSE:EK) or Lucent (NYSE:LU), both down some 50% from their 1996 perches.) 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.
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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 to in it? 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. Read Rich Smith on when to sell a winner and Shannon Zimmerman on when to sell a mutual fund.
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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 in our Broker Center, which features some of them.
- 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 you have a lot more confidence in, and make your dollars back more reliably on that stock. I made the mistake of acting on greed and fear when I invested in Martha Stewart Living Omnimedia (NYSE:MSO) a while back.
Next week I'll be back with some additional common investing mistakes. Until then, if you're looking for some very promising stock (and fund) ideas, I invite you to test-drive any of our investing newsletters -- for free. Their performance might impress you.
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Selena Maranjian's favorite discussion boards include Book Club , The Eclectic Library , Television Banter and Card & Board Games . She owns shares of Microsoft, Wal-Mart and Berkshire Hathaway. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.
