Investment Mistake You Made In 2013
We all have good years and bad years when it comes to investing. However, 2013 offered a lot of opportunities for investors since all major stock indices saw huge gains this year. If you had a bad year during 2013 your investment strategy could use some tweaks and fine tuning. As an investor your objective should be to at least pace what the overall market has done. If your portfolio fell short of market gains or (even worse) was in the red it’s time to rethink your strategies and make some new years resolutions so you an avoid investment mistakes in 2014.
Today I’m going to discuss investment mistakes to avoid in 2014. When the overall market performs well and you perform poorly this usually signifies that many of the mistakes you made were avoidable; and piling losses were a result of bad or emotional decisions. The following mistakes are often made by new investors or unsuccessful investors due to lack of proper training.
1. Doubling Down on Bad Investments
2. Not Having A Plan
3. Buying High
4. Not Understanding Your Investments
5. Becoming Over Invested
6. Not Cutting Losers Soon Enough
7. Trying to Predict Lows and Highs
Doubling Down On Bad Investments
It is human nature to try and turn around a bad situation as quickly as possible. One of the toughest urges to fight is not investing more money in a bad investment. I understand why it happens all the time, however. You feel that if the stock you purchased as $5.00 is now trading at $2.00 its an even better investment opportunity now. Some times when there is smoke there is fire. Bad investments can put a huge damper on your portfolio if you do not manage them correctly. Often times it is better to take a loss and move on then to put more money into a stock that continues to lose value. In this situation if you still like the investment then you can ride out the storm, but avoid the temptation to invest more money.
Not Having A Plan
Not having an exact plan when you purchase a stock is a big mistake. Many of the mistakes that I mentioned in this post (buying high, doubling down, not cutting losers, and trying to predict highs/lows) are all mistakes that happen when you make you initial investment without a plan. When I decide I want to purchase any security I set strict limits on price I’m willing to pay, price I’m willing to sell for, how I’m going to purchase the security, and when it’s time to cut my losses. When you make any investment you should consider setting a rule that you follow so you do not end up making an emotional decision that can cost you big time.
For example earlier this year I was very interested in buying Bitcoin. Believe me the higher the price went the more I wanted to buy in. Instead of purchasing the coin I set a price I was willing to pay. One night after bad news came out that dramatically effected the price I was sitting at my computer waiting for the price I wanted to pay. At around 4 a.m. the price fell below my threshold, the only problem is I had fallen asleep at my desk and when I woke back up the price was already $50.00 above the limit I set. I was furious…I waited over a month for a price like this and the 15 minute window had passed. Despite my gut feelings I passed up the investment because it was above the strict limit I set. A few weeks later some more bad news struck and the price had fallen even lower. This time I was able to get in well below the threshold I set. The reason why I was able to get such a great price is because I made a plan and stuck to it. Now I know I could have set a bid and got it where I wanted to, but when I set mt threshold it was before the bad news broke. After the news I wanted to wait and see if it would go lower than I originally predicted.
Buying High
Just like the example I mentioned above with Bitcoin buying high is a mistake I see happen all the time. It’s only natural to want something that you can’t have (well at least right away). As the price continues to climb on a security it begins to become more desirable. This is an emotion smart investors have to continually battle. Remember, originally you didn’t purchase the security because you thought the price was high. Now that it is even higher you need to fight the desire to own it and remember if it was to expensive before it is now way to expensive to purchase.
Not Understanding Your Investments
If you don’t understand a business, then it is not a great investment for you. But not fully understanding the business model you are really limiting your chances of success. You will not know what to look for when making future decisions on the security, because you will not have he right information (you may even be looking at the wrong information entirely). Stick to stuff you know and understand and you will be able to profit off people who do not understand what the business does and what is good or bad for the business.
Becoming Over Invested
Diversity is preached your entire life. It’s probably one of the first rules you learned about in your middle school finance classes. It’s also a rule that is easily overlooked. When making investments you need to make sure you do not become over invested in one particular stock, one particular asset class, or one particular industry. Just because you own dozens of different stocks does not mean that you are diversified. Think carefully about the investments you are making. Some industries are tied closely together and when one does bad the other will as well. It is important to consider the connections between the businesses you plan on purchasing. Also, make sure to leave cash in your portfolio and consider buying bonds if you do not have any.
Not Cutting Losers Soon Enough
Going back to mistake number 2 (not having a plan) you don’t want to hold onto a loser. If you invested in a risky security in hopes for quick gains you do not want to hold onto that if it goes the opposite way you predicted. One of the ways to avoid this is to set a stop loss immediately after you purchase the security. This was if an investment goes below that threshold your broker will automatically dump the security.
Trying to Predict Lows and Highs
No matter how many times you are told you cannot predict highs and lows you continually try to buy at the bottom or sell at the top. I was talking with someone about investing in Bitcoin and they were telling me how they were buying and selling coin as the price fluctuated. This is an extremely dangerous strategy. Often times this strategy is magnified when you guess right the first few times. After you guess right your confidence will go up and you might begin to believe that somehow you figured out what no one else can. Do not try and predict highs and lows. A better strategy is progressive buying and selling.
To do this simply set a price at which you are willing to purchase a security. Take the money you have available to use towards that investment and split it into a few parts. There is no exact science here, but you want to make sure you are buying at the lowest average price and selling at the highest average price. To do this you need to invest as the stock is falling and sell when the price is rising.
Decide what your investment points are going to be. Lets say we have a stock trading at $5.00 and you are willing to invest $900 dollars. This would equal 180 shares at $5.00 a share. So you set up your scale where you can get 225 shares with your $900 (Average price of $4.00 a share). To do this you would need to buy 75 shares at $5.00 a share, 75 shares at $4.00 a share, and 75 shares at $3.00 a share.
This is a 1:1 ratio of number of shares purchased. It is a matter of preference if you want to buy at a 1:1 or 1:2 or more. But before you purchase the stock figure out what prices you are going to reinvest, how many shares you want to buy at each price and how much money you will need to purchase the stock at each price level. Sometimes the price will not fall, it will go up. With the progressive buying system you will not have as many shares as you wanted originally, but you will still be making profits on the shares you did manage to purchase. To do a progressive selling system plan it out the same way start selling as the price is rising.
By doing a progressive system you are guaranteeing yourself you will not sell at the highest point or buy at the lowest point. However, you will guarantee yourself that you are not chasing highs and lows which will get you into big trouble over your lifetime. This is one investment mistake to avoid in 2014!
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