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Three Investing Mistakes to Avoid at All Costs

4 April 2018 No Comment

As anyone who has ever tried it will tell you, investing is great when it works out and not so great when it doesn’t work out. Simply put, everybody likes to win but nobody likes to lose.

With that said, here are the top three mistakes that cause investors to end up in the red.

Mistake #1 Trying to Make Back Losses Through Risky Trades

This is by far the most common investing mistake. And, believe it or not, it’s also a common gambling issue known as “chasing.” It’s when someone who has lost money attempts to make it back by doing the same activity that cost them money initially.

In the world of investing, chances are you will find yourself staring at a screen displaying your losses at some point in your career.

In terms of the stock market, chasing losses is dangerous, because there are more risky types of trades that investors naturally gravitate to in an attempt to make back their losses.

Some common ways are options, using increased margin to trade stocks, and trading futures. All three of these methods use increased leverage, and although this means returns can also be increased, so can losses. That’s why brokerages like tastyworks make sure investors are sophisticated and qualified before they trade options or futures. Attempting to “make it all back” by buying put options and hoping for a market crash is highly unlikely and is tantamount to gambling.

It’s always wise to cut your losses short and never attempt to make back your losses though riskier investments.

Mistake #2 Not Keeping Your Transaction Costs Low

Unfortunately, this is another all too common investing mistake. Many novice investors don’t do research to find a good stock broker with low commissions, and they end up overpaying on every trade.

Some of the newest online brokers offer trades around $3 to $4, but many outdated brokers still charge nearly $10.

At the end of the year, even for an infrequent trader, spending $7 to $10 per trade quickly adds up. As an investor, minimizing the amount of money you spend in commissions will instantaneously make you a better trader.

Mistake #3 Having a Short Timeframe

At the end of the day, all investors want the same thing – to make money. However, some investors want to make money just a little too fast. It is important to keep your expectations in line with the markets.

If you want to make $1,000,000 on a $20,000 portfolio, it is almost guaranteed to not happen in one day, week, month, or even an entire year. Regardless of your investment strategy, unless it’s day trading, gains from investments can take a long time to materialize.

If you bought $20,000 worth of Netflix stock in early 2010 and held it for six months, you would have profited $16,000. However, if you would have held it for a period of eight years after buying it in 2010, your original $20,000 investment would be worth approximately $566,000.

That is the power of long-term thinking and long-term investing. If you make one of these investing mistakes, it’s not the end of the world. As the old saying goes, “it’s perfectly okay to make mistakes, just don’t live with them.”

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