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Each investor gets in the stock market with the same main goal- to add to their own wealth. For generations, the stock market has shown to be a winning strategy to establish personal riches for investors around the globe. Although a lot of investors are fortunate in their quests, there are as well numerous others who lose money attributable to several basic investment errors. The five most common investment errors are the lack of portfolio diversification, ineffective market timing, lack of reinvestment, emotional investing and overpaying for investments and investment advice.
1. Lack of Diversification
Diversification is among the fundamentals to a flourishing investment portfolio, yet so many investors neglect to properly address this step. Whenever an investor decides to invest into a particular industry sector or into a particular company without diversifying across other investments, they're essentially putting all of their eggs into one basket. This move can significantly add to the investor's portfolio risk and the possibility for loss of capital. A properly diversified portfolio will adhere to all components of an asset allocation, considering risk tolerance, investment capital available, investment time frame and the current portfolio's investment class weightings.
2. Market Timing
Some investors get wind of success stories from investors and traders who win big time by timing the markets. Although market timing can turn out to be successful for a lot of investors, many investors make the mistake of investing into a stock while its price is climbing instead of at the ground level. Another market timing error is selling an investment when the investor thinks that the stock is about to come down, potentially causing the investor to lose capital growth opportunities if the stock does not in fact drop-off as anticipated. Though market timing is a winning strategy for many investors, it can be a risky investment strategy and is not suggested for most investors.
3. Lack of Reinvestment
Whenever an investor is to sell off their investments, a big mistake that can be made is to not reinvest the money into a different investment, therefore holding the proceeds in cash. In many cases, it is advisable to reinvest the proceeds into another stock that meets the investor's own objectives. Another reinvestment error occurs when investors fail to take advantage of the opportunity that a lot of investments offer the ability to reinvest dividends. This is an good strategy for wealth building and should be considered by nearly all investors.
4. Emotional Decisions
Most investors make their trading decisions on an emotional basis rather than on a logical basis. For instance, emotional investors will sell off an investment as it is dropping in price, therefore taking a loss instead of waiting for the market to re-correct. Although the overall investment goal is to buy when low and sell when high, a lot of investors execute the exact opposite strategy based on their emotional reactions.
5. Overpaying for Investment Fees
The price that is paid for investments can have a huge impact on an investor's total investment return. Consider investment trading fees, investment transaction fees and up front prices for investment advice in order to ensure that your net investment returns are as healthy as possible.
