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7 Investing Mistakes To Avoid

Investing is not just about picking winners, but also about avoiding mistakes. At a time like today, when the stock market is down more than 50% from its peak, its important to review some basic ideas about how to invest. You can be better off if you avoid making the following mistakes.

Mistake 1: Over enthusiasm to trade - not every ball should be hit

Good batsmen realize that some balls outside the off-stump should just be left alone. Similarly, professional investors realize that sometimes its better to just stand still than to rush into a stock. Retail investors often make the mistake of "flashing outside the off-stump" because they cannot resist the temptation to trade in every opportunity. And, like an inexperienced batsman, they suffer the same fate.

Too much trading will to lead to a lot of churn, extra commissions to your broker and huge tax implications for you. Some of the world's best investors follow a buy and hold strategy - you should too.

Mistake 2: Overconfidence - don't be unrealistically optimistic

A bull market makes retail investors believe that they are geniuses - after all, anything they put money into goes up. This overconfidence in their own abilities leads to a complete disregard of the risks involved. Every new generation that invests in the market ignores the lessons of history. These new investors wrongly believe that stock prices only go up.

As we are painfully experiencing today, markets do come crashing down.

Mistake 3: Missing the benefits of compounding of capital - learn from Einstein

Albert Einstein is reputed to have said that compounding of capital is the 8th wonder of the world because it allows for the systematic accumulation of wealth.

Compounding of capital can benefit you only if you leave your money uninterrupted for a long period of time. Unfortunately, most of us interrupt this process of compounding by buying and selling too frequently.

Mistake 4: Worrying about the market - but there is no answer to your favourite question

Retail investors are obsessed with the question "where do you think the market will go?" This is the wrong question to ask. In fact, no one knows the answer.

The right question to ask is whether the company whose stock you are buying is going to be a much bigger business 10 years from now or not.

Mistake 5: Timing the market - 99% of investors will fail in this strategy

Its very difficult to time the market, i.e., be smart enough to buy at the absolute bottom and sell at the absolute top. Professionals understand that timing the market is a wasted exercise.

Retail investors always wait for that elusive best opportunity to get in or to get out. But by waiting they let great investment opportunities go by. Use systematic or regular investment plans to make investments.

Mistake 6: Selling in times of panic - you should be doing the opposite

The best opportunity to buy is when the markets are falling and there is fear in the minds of investors. Yet, many retail investors do exactly the opposite. They sell when the markets are falling and buy only when the markets are high. This way they end up losing twice - by selling low and buying high, when they should be doing exactly the opposite.

Use the current weakness in the markets to buy good strong businesses that have survived previous recessions successfully. Some of the world's biggest fortunes were made by buying when others were selling in panic.

Mistake 7: Focusing on past performance - its like driving forward while looking backwards

It is a very common perception that because a stock has done well in the past 1 year, it's the best stock to invest in. Retail investors do not realize that often the best performers will underperform the market in the future because their optimistic outlook has already been priced into the stock.

Don't go after hot sectors that are currently producing high returns. Look forward to see whether the gains produced in the past can get repeated or not. Short-term trends of the past might not get repeated in the future.

Investing is all is about patience and discipline. Learn to recognize when you might be falling into the trap of making the above mistakes. By avoiding mistakes you too can improve the long-term performance of your portfolio, whatever the economic conditions prevailing in the market.

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