subject: Major Mistakes That an Investor Should Avoid [print this page] Major Mistakes That an Investor Should Avoid
We surely can run to the debt settlement companies seeking their debt relief options if we find our debts disturbing our financial condition but the same cannot help us at times of crisis caused by failures in investment policies. In that case we must take precautionary steps to avert those mistakes which can make our profit and returns doubtful and unimpressive. Let us thus check out the following investing mistakes that every investor should avoid:
Almost every investors are aware of the benefits and importance of diversification as the words of diversification have been drilled into our minds that we should not keep all our eggs into one basket; but there is much more than that to it. In fact, many people are doing more damage than good in their effort to diversify. Like everything in life, diversification can be taken too far. If you split up $100 into one hundred different companies, each of those companies can, at best, have a tiny impact on your portfolio. In the end, the brokerage fees and other transaction costs may even exceed the profit from your investments. Rather one can invest in an index fund which is made up of many companies.
Remember to choose an investment option based upon your time frame or depending upon the amount of time you can invest until withdrawing the money from the market with returns. Regardless of your age, if you have capital that you will need in a short period of time (one or two years, for example), you should not invest that money in the stock market or equity based mutual funds. Although these types of investments offer the greatest chance for long-term wealth building, they frequently experience short-term gyrations that can wipe out your holdings if you are forced to liquidate.
Avoid the idea of frequent trading as none of frequent traders could make any fortune out of that act. When you invest, your fortune is tied to the fortune of the company. You are a part-owner of a business; as the company prospers, so do you. Hence, the investor who takes the time to select a great company has to do nothing more than sit back, develop a dollar cost averaging plan, enroll in the dividend reinvestment program and live his life. Daily quotations are of no interest to him because he has no desire to sell. Over time, his intelligent decision will pay off handsomely as the value of his shares appreciates.
Fear based mistakes are the most common and expensive, as many investors do their research, select a great company, and when the market hits a bump in the road - dump their stock for fear of losing money. This behavior is absolutely foolish. The company is the same company as it was before the market as a whole fell, only now it is selling for a cheaper price. Common sense would dictate that you would purchase more at these lower levels.
Keeping these mistakes in mind would help the investor to invest wisely without giving in to rumors, words of mouth and what processes are being followed by other investors; it is important to carve one's own niche in this market by following the intellect and instinct and not emotions.
