Common Investing Mistakes to Avoid

Learning from others' mistakes accelerates your investing journey. This lesson covers the most common and costly errors investors make. [DEFINITION] Behavioral Bias: Systematic patterns of deviation from rational decision-making, often driven by emotion, cognitive shortcuts, or social influence. ### Mistake #1: Trying to Time the Market The dream: Sell before crashes, buy at bottoms. The reality: Even professionals can't consistently time markets. [EXAMPLE] Missing just the 10 best days in the S&P 500 over 20 years reduces returns by more than half. These best days often occur during the most volatile periods—when timers are on the sidelines. [KEY] Time in the market beats timing the market. Stay invested. ### Mistake #2: Chasing Performance The pattern: 1. Hear about a hot stock/fund 2. Buy after it's already risen 3. It underperforms going forward 4. Sell at a loss 5. Repeat with next hot thing Why it fails: Past performance doesn't predict future results. What's already risen may be overvalued. ### Mistake #3: Panic Selling [SCENARIO] Market drops 25%. You panic and sell. Market recovers 40% over the next year. You locked in losses and missed the recovery. This pattern—selling low and buying high—is the opposite of successful investing. [TIP] When you feel the urge to panic-sell, that's usually exactly when you should be buying or at least staying put. ### Mistake #4: Overconcentration Putting too much in one stock, sector, or asset class: - Feels confident when it's working - Devastating when it turns - Individual stocks can go to zero Diversification isn't exciting, but it protects you from catastrophic losses. ### Mistake #5: Ignoring Fees **1% annual fee impact over 30 years:** - $10,000 at 7%: $76,000 - $10,000 at 6% (after 1% fee): $57,000 - Difference: $19,000 (25% less) Seemingly small fees compound into massive wealth drags. ### Mistake #6: Overtrading [WARNING] Every trade has costs: - Transaction fees (even if small) - Bid-ask spread - Taxes on gains - Time and attention Studies show: The more investors trade, the worse their returns. ### Mistake #7: Anchoring to Purchase Price "I'll sell when it gets back to my buy price." The stock doesn't know (or care) what you paid. The only relevant question: Is it a good investment at today's price? ### Mistake #8: Confirmation Bias Seeking only information that supports your position: - Following only bullish analysts on stocks you own - Ignoring warning signs - Dismissing valid criticism as "FUD" Force yourself to read bear cases for your holdings. ### Mistake #9: Following the Crowd [EXAMPLE] Bitcoin at $60,000 with everyone talking about it = risky. Bitcoin at $16,000 with everyone declaring it dead = potentially opportunistic. When something becomes consensus, the opportunity may already be priced in. ### Mistake #10: Not Having a Plan Without a plan, you react emotionally to every market move. With a plan: - You know what to buy - You know when to rebalance - You know how to respond to volatility - You make fewer mistakes [EXERCISE] You bought a stock at $50. It's now $35. A friend says, "It's 30% off! Great time to buy more!" What questions should you ask before averaging down? |ANSWER| 1) Why did it fall? (Is the business deteriorating or is it market noise?) 2) Has my original thesis changed? 3) Am I averaging down on a value opportunity or catching a falling knife? 4) Will this make my position too concentrated? 5) Would I buy this stock at $35 if I didn't already own it? Averaging down can be smart or disastrous depending on answers. ### Creating Your Anti-Mistake Checklist Before every investment decision: 1. Am I following my written plan? 2. Am I reacting emotionally? 3. Have I considered the opposite view? 4. Is this position appropriately sized? 5. Am I chasing or being patient? 6. Would I be embarrassed to explain this decision? [SCENARIO] Your friend made 200% on a meme stock and won't stop talking about it. You feel left out. What should you do? Recognize the FOMO. Your friend's success was likely luck, not skill. For every meme stock winner, there are many losers who don't talk about it. Ask: Would I make this investment without the social pressure? If the answer is no, don't make it. Stick to your plan. One friend's anecdote shouldn't override your strategy.