Common investment mistakes to avoid [Updated 2024]

Regarding investing, nobody is perfect, not even Warren Buffett. 

There will be wins, and investments will gain in value. For that to happen, others will need to face losses. 

However, investors make several standard mistakes when trading stocks. They may make several simultaneously or just one that can wreck their investment portfolio. 

Worse, some investors will repeatedly make the same mistake and never learn from their previous mistakes. 

Add in the coronavirus pandemic, and the mistakes investors made hit new lows as people panicked and maybe sold too early or did not buy quick enough.

The good news is that investors can avoid most of these mistakes by stepping back and identifying what they do at each stop. Hopefully, they will prevent sabotaging their existing investments and build on them as they head into a (hopefully) prosperous 2021.

12 common investment mistakes to avoid

1. Not having clear investment goals

For most investors, this isn’t an issue – their goal with investing is to have a stable income in retirement. Most retirement funds are set up by their employees or have brokers manage them. 

But what if you’re not saving towards retirement? You may wish to save for a one-off purchase or an income.

Whatever your investing goal, make sure you stick to it. Changing your reasons for investing means you’ll make short-lived decisions impacting your investments.

For instance, Don’t invest for the long term if you plan to use the funds within a couple of years.

2. Failing to diversify enough

Diversification in investments is spreading your capital across entirely different types of assets – cash, bonds, shares, property, commodities, P2P and even precious metals and collectables like art and cars. 

The reasoning is straightforward. Should one of those assets drop in value, it does not mean the others will. So should the stock market face a downturn, then investors’ other assets can maintain their return rate through other investments. 

Some assets even work in reverse: Historically, bonds do better when shares take a nosedive and vice versa. The issue is that most investors don’t diversify enough. 

3. Buying high and selling low

Most investors’ instincts tell them to acquire shares after a day or a week where they’ve done well (Waiting to see if it is a good deal). Shares have risen a percentage in the last quarter, so they must be worth buying. 

Sadly, this means an investor is buying high.

Alternatively, investors often instinctively sell when their investment begins to decline rapidly. They panic and start to sell their shares. 

However, they are now selling when their investments are at their lowest. 

Buying when shares are high and selling them when they are low is a surefire way to destroy investor portfolios.

It is best to buy a little each week or month, and if needed to be sold, only when needed.

4. Averaging down rather than averaging up

Averaging down is typically used by investors to cover up their mistakes. For example, if an investor buys shares at €2.50 and it drops to €1.25, they begin to diminish the impact of that drop by buying more of the same shares at the new lower share price of €1.25. 

However, this has now compounded error after error. The result is that the investor has bought shares at €2.50 and more at €1.25, lowering the average price per share. Hence, this makes their loss ‘on paper’ far smaller. 

However, they have thrown good money after bad in reality and sinking more money into what is a losing trade. 

Rather than averaging down, investors should average up – only buying the shares once they begin to move in the direction an investor anticipates.

5. Trading too much and too often

Several investors begin to relish the ‘game’ of investing and play around with investments out of their comfort zone. 

The issue is that buying and selling more shares incurs more transaction fees. 

Whether an investor uses a brokerage or investing themselves, transaction fees begin to eat into any gains made (if any) each time an investment is bought and sold. 

It is always better to make a diversified plan and leave it as per your investment goals.

6. Reacting to media speculation

The media relishes drama, and hyping up an investment opportunity or panicking about losses engages their audience more. 

Either they will convince you that an investment is a sure thing or the next day that the stock market has hit an apocalyptic nightmare.

Usually, neither is true. 

Remain calm and careful. Don’t fall for the media hype; investigate when analysing your investments. 

7. Following what others do

Usually, most investors learn of an investment once it has begun to perform well. 

As per the point above, once the media learns of this, they begin to broadcast how hot the shares are, and everyone should jump aboard the opportunity.

Sadly, by this time, the shares have peaked in value. As per the high buying section, the investment becomes overvalued and begins to drop in value once the hype is over.

8. Chasing yields

Investors are always tempted to delve into whatever investment happened to have the best returns during the preceding years.

When they see a similar type of investment, they jump into it. 

However, this strategy is flawed for several reasons. Past performance is never indicative of future returns. Plus, the higher the yield, the higher the risk. 

Suppose you jump to a similar investment with a higher short-term yield. In that case, there’s an excellent possibility that the next year will be worse than the investor already has. The investor must then sell, incurring more transaction fees on highly volatile shares. 

9. Trying to time the market

No one can guess whether the market will rise or decline. Not even Warren Buffet.

The stock market has so much daily volatility that guessing what will happen is practically impossible. 

Attempting to guess what the market will do could not only be disastrous for an investor’s investment, it will trigger more transaction fees. 

10. Not doing due diligence

Whether it is the media or an article you have read about potential investments, it does not mean you should place your money into it. 

When articles and the media mention an investment opportunity, it is likely from investment advisors with their own financial interest for hyping a particular investment. 

That does not mean the investment is over-hyped. It means that investors should recognise the opportunity and do their due diligence.

Be vigilant. Make time to thoroughly research the investment prospectus or the company offering the investment before investing. 

11. Not considering enough alternative investments

Usually offered only through institutional and high-net-worth investors, alternative investments continue to grow in popularity and are now included in retail (individual) investors’ portfolios.

Alternative investments typically don’t correlate to the stock market, meaning they add diversification to a portfolio and help reduce stock market volatility. 

Like any investment, the return rate for alternatives is not guaranteed. Still, there is potential for it to be higher than that of traditional investments. 

Advocates of alternative investments claim their portfolios offer potentially higher returns that were only available to institutions until relatively recently.

12. Letting emotions get in the way

The number one reason for ruining an investment portfolio is emotion. The premise that fear and greed rule the market is correct. That “greed is good.“

However, investors should not let greed control their decisions. 

Instead, they should prioritise longevity as larger-capitalisation shares will usually return on average 10% historical returns.

Over a longer timeframe, a portfolio’s returns should not deviate much from those historical averages. 

Patience is a virtue that serves investors well, rather than those who act emotionally and irrationally, as per the reasons mentioned above. 

Final thoughts

Mistakes are a learning curve of the investing process. 

Identifying which ones an investor commits will better serve them by helping to avoid making them again. 

To avoid making the same errors and mistakes when investing, investors should prepare an investment strategy and remain with it.

If they wish to seek out riskier or high-yield investments, ensure they have some side money away from the leading portfolio. 

Never use funds from the leading portfolio. And be prepared to lose some of these side funds.

If you follow those steps, you’ll evade most of these common investment mistakes over time. 

Plot a simple course and stick to it through the short-term gains and falls. In the long term, it will pay off.