Top 6 Investing Mistakes of All Times

This post originally appeared here and is by Mastermind, Sana Securities.

Meeting with individual investors over the years has taught me much about investing mistakes. No matter how you classify investors (i.e. fundamental, technical or confused), the mistakes they make are almost invariably identical.

While some mistakes are the result of simply not knowing what to do, many are the results of either (i) losing interest; or (ii) getting overly greedy or fearful, particularly when the tide turns. In either case, much money is lost when people assume things will simply take care of themselves.

Below I talk about 6 most common investing mistakes particularly when it comes to stock investing:

• Not Being Adequately Diversified

I am often surprised how many investors end up getting invested in just 1 or 2 stocks. Major cause: I have heard of something called ‘Cost Price Average’ theory (discussed here); the approach is senseless and noble at the same time. Senseless because it’s a perfect case of good money being thrown at bad money; noble because it graciously places confidence in a stupid decision which did not quite work in the first place.

Understand the importance of diversifying investments among different asset categories and industries.

While diversifying, make sure you own at least 10-15 individual stocks (with no more than 10-20% in any one stock). Choose your sectors carefully or invest in broad-based mutual funds that diversify the money for you. I am a big believer that if investing is not your core activity, then your core portfolio should be in high quality mutual funds, of course you can choose to invest a portion of it in individual stocks yourself. And even though I talk of 10-15 stocks above; if done correctly, even a 5 stock portfolio accomplishes adequate diversification.

• Being too diversified

Exactly 2 weeks back, I was introduced to a new client who said that despite investing in so many funds he was not making any higher return than he would make in a fixed deposit. I told him this – it’s because you are invested in so many funds that you are not making any higher return than you would make in a fixed deposit.

Get ready for this – his portfolio had 34 mutual funds and some individual stocks. Of course, he had no clue how he was monitoring things.

The maximum number of funds you should own is 3. Not 4. You can take the number of stocks up to 10 but not much more.

• Getting Involved With Your Emotions

I will not talk about fear and greed anymore – you know about it. How you deal with such forces is entirely up to you. Go read books and blogs on behavioral finance. It is unlikely they will help you at first but keep reading them again and again, may it’ll work.

Signs of being an emotional investor:

• Refusing to take a loss, i.e. holding on to a stock, thinking it’ll come back at some point (without any attention being paid to changing fundamentals)
• Selling stocks because of correction in stock prices (without any attention being paid to changing fundamentals – read about ‘overreaction and herding’ in the post above).

Making tough investing decisions requires the ability to rise above emotions. May be for this reason it is difficult for people to manage their own finances as well as professional money managers do.