15 Common Investing Mistakes to Avoid

We all make mistakes in life -- and in our financial lives, too. Even the world's greatest investors have made mistakes, too. Ideally, though, it's best to avoid as many mistakes as possible. So try to learn more about investing and learn from others' mistakes and lessons learned, too. Here are 15 common errors that many beginning investors make; some of them are ones that even experienced investors can make.

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This is a huge mistake, and it's one that takes no effort at all -- you just do nothing. It can be easy to assume that there's no rush to save and invest, if you're in your 20s -- and maybe even in your 30s. But your most powerful investments are often your earliest ones, as they can have 20 or 30 or even 40 years in which to grow -- and money can grow by crazy amounts in those later years. By procrastinating, you're robbing yourself of some big future years, when your portfolio might have grown by $100,000 or $200,000 or more, each year. Even if you are investing these days, are you doing it with big contributions each year? Aim to do so.

Next, be sure that you consider both value and price when you choose stocks in which to invest. You may find some great and growing companies, but don't just buy shares at any price. Many high-flying and popular growth stocks are actually overvalued and may well fall in price closer to their intrinsic value. Or they may not grow much more for a while, since they've been bid up so high already. For safer, best results, look for wonderful undervalued stocks -- which offer a margin of safety. That's what the best value investors do.

It's also critical to know what to expect when you're a stock investor. For example, expect volatility. Expect that the entire stock market will dip and drop now and then -- every two or three years, in fact, on average. And there will always be occasional recessions. Know that legendary investors -- and ordinary investors -- have grown wealthy over long periods that include such dips and jumps.

ALSO READ: How to Invest in Stocks: A Beginner's Guide for Getting Started

If you're planning to invest in stocks, or you've already done so, make sure that you don't expect to need any of that money for at least, say, five years, if not more. Why? Well, because the stock market can drop at any time, and if it does right before you were going to sell a bunch of shares for a down payment on a home (or any other purpose), you'll have to sell many more shares, and that can derail your portfolio's progress. The stock market usually recovers from big drops within a year or two, but it could take several years, and possibly even a decade. Play the long game.

This is a biggie. If you're buying into companies you don't understand, you're extra vulnerable to experiencing some nasty surprises. It's important to understand the industries in which you're investing and to appreciate that some are much easier to understand (retail, consumer products) than others (biotechnology, financial services). You also need to know how any company you're studying really makes its money. McDonald's (NYSE: MCD), for example, doesn't just prosper by selling lots and lots of fast food. It makes much via franchising its business, and it's a major real estate owner, too, leasing out properties to franchisees.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Many investors make this blunder: They read about a mutual fund (or a stock, for that matter) that performed amazingly well in the past year, and they invest in it expecting similar results in the next year and the year after that. But that amazing performance was very likely just an outlier, due largely to good luck. When seeking great mutual funds, look for managers with great track records and philosophies you respect, along with relatively low fees and low turnover. (A high turnover rate suggests that management is being impatient and doesn't have long-term confidence in many holdings.) Look at the long-term performance of funds you're considering -- checking out individual years' performances as well as multiyear averages. You want to make sure that a great 10-year average isn't mainly due to a single outlier year.

Most investors don't have the time or interest to study and keep up with the universe of thousands of stocks (and/or mutual funds). For them -- for most of us -- low-fee, broad-market index funds may be the best investment. Index funds are no kind of compromise: They have outperformed most actively managed mutual funds over long periods and will give you close to the overall market's return year after year. You can do quite well with just index funds over many years.

ALSO READ: 3 Reasons to Invest in Index Funds

It's also a costly mistake to ignore dividend-paying stocks -- perhaps because you assume they're mainly for retirees. There's so much to love about dividend payers: For starters, as long as the dividends are coming from a healthy and growing company, they'll likely arrive regularly, in bull markets and bear markets, through boom years and recessions. Better still, healthy and growing companies tend to increase their payouts over time. And on top of that, you can expect their stock prices to grow over time as well. Yes, retirees may welcome all that incoming cash, but young investors can welcome it, too, and reinvest it in additional shares of stock that can grow over many years.

Here's another rookie mistake: selling too soon. You might invest in a stock with great expectations and be happy to see your stock surge by, say, 30% or more over just a few weeks or months. At that point, many people will sell, happy with their gain. But if the company is performing well and you think it has a lot of long-term growth potential, you might do much better than 30% by just hanging on. Hanging on for many years (while keeping up with the company's progress, of course) can end up delivering a gain of 200%, 500%, or even 10,000%. Much wealth has been built by just buying into great companies and hanging on -- for decades.

ALSO READ: When to Sell Stocks -- for Profit or Loss

Not every stock should be held for decades, though. If you have a stinker in your portfolio, you might err by selling it much later than you should have. Imagine, for example, that you're sitting on a 50% loss on a stock. You no longer have confidence in management or in the stock's future growth potential. But you hang on stubbornly, aiming to earn back that 50% before selling. That’s wrongheaded thinking. That stock isn't likely to bounce back robustly, so you shouldn't have your money in it. Instead, sell, take that loss, and move whatever remains into another stock. If all goes well, you'll earn back that 50% -- but in another stock in which you have more confidence. Always keep your money invested in your best ideas, not in ones you've lost faith in.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Buying penny stocks (those trading for less than about $5 per share) is an extremely common mistake, and it's easy to see the appeal: For, say, just $500, you can buy 2,000 shares of a stock trading for $0.25 -- or 25,000 shares of a $0.02 stock. Who wouldn’t want to own 2,000 or 25,000 shares instead of, say, 10 shares of a $50 stock? But a $0.02 stock isn't necessarily dirt cheap -- there's a good chance it will soon be a $0.01 stock, or less. Penny stocks are often tied to shaky, unprofitable businesses and are best avoided. A stock trading for $500 per share can easily be undervalued and on its way to $2,000 per share. Don't judge a stock by its stock price alone.

If you haven't heard of investing on margin, here's what it is: You buy stocks with money you borrow from your brokerage, paying interest for the privilege. This is done by many investors, in the hope that they can amplify their gains by buying many more shares than they can afford on their own. If all goes well, they will profit well. But things don't always go as planned, and if the shares fall in price, your losses can be amplified as well. Many investors see much of their wealth wiped out thanks to investing on margin.

ALSO READ: What Is Margin & Should You Invest on It?

Are you ready to jump into one or more stocks, but are waiting for a market pullback before doing so? Are you perhaps thinking that the market has dropped recently, but it may drop some more, so you're holding off, hoping to get in at the perfect time? Well, if so, you're engaging in market timing, which isn't an effective way to invest. If you're ready to invest and have identified some promising, undervalued stocks, it's probably best to just go ahead and invest in them. If you're not quite sure, you might split up your purchase, buying, say, a third of your position now, a third in a month, and the last third a month later. If you plan to invest in a broad-market index fund, just go ahead and do so -- and aim to keep adding money to that investment over time.

It's possible to overdiversify -- there's no need to have, say, 300 different stocks. You'll have trouble keeping up with that many companies, too. But don't underdiversify -- don't have too many eggs in too few baskets. For example, if you’re very bullish on Chinese stocks, don't fill your portfolio with them, because there might be geopolitical events that take down your whole portfolio for a long time. If you know retail very well, you might fill much of your portfolio with retailers, but something like a pandemic might hurt most of them. Spread your money across different companies and industries -- and perhaps a few different countries as well.

ALSO READ: Understanding Portfolio Diversification

Finally, don't make the mistake of being impatient. Understand that great stocks and the overall stock market tend to go up over time, but they don't do so in a straight line, and they don't always do so quickly. Many great companies and stocks will have periods when they slump. Just keep up with them and their developments, and as long as they remain well managed and promising, hold one.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

There are plenty of other investing mistakes that people make. It's worth reading up on investing and great investors throughout your investing life, in order to learn about smart strategies and to learn about mistakes made that you might avoid. Read the annual reports of companies you're invested in or are interested in, and read about great businesses and how they were built. The more you know, the better an investor you'll likely be.

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