Advertiser Disclosure

NerdWallet’s Top 5 Most Common Investing Mistakes

April 25, 2012
Credit Cards
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own.

Whether you’re a seasoned investor or stock market neophyte, familiarizing yourself with the most common investing mistakes can only strengthen your financial foundation. Even though these mistakes are widely known and consistently reported by finance gurus, people continue to stumble into the same sordid pitfalls. If you’re reading this article, congratulations. You’re taking the time to protect yourself against the most prevalent miscalculations plaguing investors.

1) Obsession with the past

This is often referred to as “buying high and selling low.” Most people having at least some passing familiarity with the term. At its core, it means using yesterday’s triumphs and failures to predict those of tomorrow. If a stock shoots up, you may be inclined to believe it will do so again. You buy high. If a stock plummets, you get scared it will fall further. You sell low. Past performance is not necessarily an indicator of the future. Stocks aren’t often perfectly linear. They undulate. You must have the patience to ride out rocky patches and the wisdom to refrain from splurging indiscriminately on recent successes. Think of it this way: how will buying stock for a high price and selling it for a low price ever yield profit?

2) Failure to diversify

If you’re investing a sizable chunk of money, understand the very real possibility of losing it all (more about this under mistake #4). You don’t want all your money tied up in a single industry or company. Spread your net wide so the fate of every penny is not determined by a single variable. This mistake often goes hand-in-hand with overconfidence. Don’t be so arrogant as to think your company of choice is infallible. You could get lucky, but you could also lose everything. We suggest fulfilling 3 categories. Make a medium-term fixed-income investment,  an international investment and a growth investment.

3) Listening to Nostradamus

Lots and lots of people love to tell you what to do with your money. And that’s fine. Some of them are smart, and you’d be well-advised to listen. However, remember that NO ONE can predict the future. Experts that guide you toward specific stocks should be regarded with suspicion. There has actually been research that demonstrates the incompetence of pundits to forecast the whims of the market. While you can certainly benefit from the general advice of financial gurus, banking on their predictions is on par with hitting up your local psychic for a tarot reading.

4) Poor risk analysis

Come to terms with your worst-case scenario. Before you make an investment, imagine life without the money you’re about to invest. Imagine if it was completely and irretrievably gone. How would you fare? Too many people leap blindly into high-risk investments without understanding the grave reality of the situation. No matter how promising an investment may seem, understand that it could all go up in smoke. Guard your finances by making only investments you can afford and diversifying.

5) Investing too early

If you’re just starting out, you risk investing before you’re ready. The first step is educating yourself. Read enough material to make informed decisions about where you trust your money. Then, before you drop money on a new investment, clear your name of consumer debt. There’s no sense in beginning construction on an investment portfolio if you’re $10k in the hole. Chances are, interest rates will drain you faster than the rate at which your investments earn. It also does not hurt to put aside an emergency fund. Depending on your needs and investments, the amount could be anywhere from $1k to a year’s salary. Once you have a secure and solid base on which to build, you’ll have the flexibility to start moving money.