- Trying to time the market
- ”It can’t go any lower”
- Trying to get rich quick
- Too risky investments
- Not diversifying enough
1. Trying to time the market
Many new and even more experienced investors often try to predict the exact highest or the lowest point of the market. However, it is very rare that people manage to tell exactly where the lowest point of the year is. Markets are driven by multiple different factors and trying to predict all of them is close to impossible.
Have a plan on how you will invest. This can, for example, be to put 10 or 20% of your salary straight into the market when you get paid. No matter the price. If the market is at its all-time high, and it seems “expensive”, that doesn’t necessarily mean it. Since the last market crash of 2020 march, there has been multiple new all time high days. Trying to predict when this will last is very difficult.
If you just keep investing monthly, you will get a good average price. If the market begins to move up, your investments will grow as you put more money into the market. If the market turns to a downtrend, you will lower the average price of your purchases.
Market crashes like the 2020 march can be good purchasing points for larger amounts, but there is no guarantee for that either. However, you can lower your average price by buying a bit more during times like that.
2. “It can’t go any lower”
If the stock has fallen a lot during the past year or decade, there probably is a reason behind that. It is true that the prices of stocks don’t always represent the real value of the stock. But if a stock of a company has been on a downtrend for longer, that can indicate that something is wrong.
I have a good example of this. I bought Norwegian air shuttle in the summer of 2020. I was with the mentality of “it can’t go any lower” because it was already down around 99% of its all-time high.
However, during the next six months, the stock was down around 90% of the price I bought it for. I decided to sell it, since I would still get the selling fees back from the money I would get from the stocks.
After I sold it, the stock kept falling and is now down around 70% from the price I sold it for. So, the lesson here is next: Even if the stock seems “cheap” because it has fallen so much, that doesn’t right away tell it is cheap.
This was a good reminder of that for me. I didn’t lose much on that trade, but I learned a valuable lesson. Since then, I have been paying much closer attention to the key figures of the companies I invest in. No one is perfect, it seems.
3. Trying to get rich quick
Investing is not a get-rich quick game. It will probably take you decades before you get rich just by investing. However, it is a good way to do so. You don’t need to dedicate much time to it. It pretty much handles itself when you learn the basics and stick to your plan.
Shorter term investing such as swing trading or day trading can be compared to short sprints. Long-term investing, however, is more like a marathon. The longer you stay in the game, the better results you will see. Compounded interest will be more effective the longer your investing horizon is.
4. Too risky investments
There are a lot of different ways you can invest in. The newest ones are cryptocurrencies and NFTs. Some early investors have seen huge returns if they bought bitcoin 10 years ago or so. However, nowadays there are so many different coins and with them come different rug pull schemes, you can lose money really fast if you don’t pay close attention to where you are putting your money.
This comes hand to hand with the last part of this text, but if you decide to do some riskier investments as well, don’t put too much weight of your portfolio into them. The goal of investing, at least for me, is to build long term wealth.
If during the first year I lose 90% of my capital because I did too many risky investments, that’s not going to help me reach my goal. If the investments seem too good to be true, there is a good possibility it is.
5. Not diversifying enough
Diversifying can be a double-edged sword. For most of the people, however, overdiversifying usually isn’t the problem, but the lack of it. Most of us don’t have 50 hours a week to spend researching the markets and trying to pick the best stocks. Even if you had the time to do so and you did, the market can still prove you and your picks wrong.
If you put all your money into one or two stocks, you can beat the market. If your picks were to perform better than the index. However, this is more like gambling. Even if the companies you invest in are great, there are so many variables in the world that can change the direction at any time.
Don’t put all your eggs into one basket. One option to diversify is to buy already well-diversified index funds or ETFs. There are differences between different funds as well. I have a post comparing actively managed funds and passive index funds. You can read it here.
If you want to get some riskier investments into your portfolio as well, like I said, keep their weight in your portfolio small enough. With good diversification, you can protect yourself against sudden changes in the world.
I’m sure there are a lot more things that can go wrong when investing. These are just some common ones I have been doing or witnessing. Even if you happen to be guilty of doing some of these, learn from your mistakes. That is the way to improvement and better investing. Hopefully this was helpful to you, have a nice day.
This is not financial or investment advice. Always do your research before risking your hard-earned money. Past returns of the market are not a guarantee of future returns