3 reasons why investors fail

Is it odd that ever since my disappointment with the Super Bowl I’ve spoken nonstop about failure?!?!  Maybe I need to go talk with someone… Anyhow, onto the post…

I’ve made some really stupid mistakes in my day, investing and just good-old-fashion stupidity.  But I’ve done a decent job avoiding investing failures for a little while now.  It took a lot of trial and error (READ: stupidity and losing money) to get there.  In case you’re wondering, some of my dumb investment mistakes are:

• Penny stock investing (READ: Pump and Dump) (you probably should check out that oldie post – yeah… I was really, really dumb there);
• Day trading (luckily got out before I got taken down);
• Options trading (lost some nutso cash but had one big win offset most of my losses and got away before I got taken out); and
• Buying stocks based on 30-second sound clips on TV investing shows (I quickly ran out of money to buy the next night’s “must have” stock and had no idea when to sell the first ones!).

Which brings me to my list of 3 investment mistakes that cause a lot of heartache.  If you can avoid these three blunders you’ll likely sleep better at night and have some killer results!

1. Paying too much attention.  How many times per day do you check the stock market?  If it’s more than one or two, you’re probably starting to get into a danger zone.  Daily or hourly swings in stocks are way too extreme and frequent for most investors to ignore.  If you see your largest holding taking throughout the day and have no idea why it’s way too easy to just hit sell.
2. Worrying about the price you paid.  The price you paid for a stock or mutual fund should have very, very little to do with holding onto that stock.  The only thing that really matters is where you think the price will go moving forward.  If I told you that the stock you bought for $50 that is now selling at $20 would drop to $10 over the next month what would you do?  Sell, of course!  What numbers were you focused on when you made that decision?  Right.  $20 and $10.  Once you learned that the stock was going to $10 you stopped basing your sell decision on the price you paid.  Let’s reverse it.  What if you knew the stock was going to hit $100 by the end of the year?  You’d hold or buy more, right?  Same examples but change the purchase price to a buck.  Same answers right (sell if it’s at $20 going to $10 and buy or hold if it’s at $20 going to $100)?  So stop waiting to get back to even and start worrying about where you think the stock is actually going.  (The one time when the purchase price matters is beyond the scope of this post, but it’s called tax gain/loss harvesting, which involves selling losers when they’re down at the end of a tax year to write off the loss against other gains.  More on that in later posts.)
3. Buying stuff you don’t understand.  If you buy a stock based on some flash-mob investment rant on CNBC you’re treading in dangerous water.  First, you likely have no idea what you’re buying or why.  Second, you often have no idea when to sell.  Third, the next day the same guru is going to have another “can’t miss” stock that you’re going to want to buy and eventually you’re going to run out of money.  Like I mentioned I fell into this trap a number of times.  Ready?  Quick, what’s a mutual fund?  What’s a bond?  What does PANL sell?  GE?  DNDN?  To whom?  How do they make money?  If you don’t know you should strongly consider not buying the stock.  Why?  If you don’t understand what you’re buying or why you’ll have no idea when to sell and why and you’ll end up making mistake number 2, above.

Got it?  If you find yourself falling into any of these tree traps it’s likely time to reconsider your plan.  If I have money I’m looking to invest and don’t need for five or more years, that cash goes directly into mutual funds or ETFs that tracks an index like the S&P; 500 – then I take a nap or hang out with my wife and kids.  This way I don’t have to worry about whether some start-up’s iPhone killer is actually going to hit the market, take market share, avoid labor disputes and keep costs down enough to survive. 

What are your biggest investing Achilles heals?

Until next time, put your credit card down and slowly step away from the mall!

Like what you see here? Tell your friends by sharing it with one of the buttons below. Post this to Facebook or Tweet it to help your friends and family, too. And don’t forget to send me an e-mail or comment to say hello. I love hearing from you.

Also, please join our recently-started Facebook community where I hope to build a place where we can all share thoughts, successes and support.  And don’t forget to follow me on twitter where you’ll find most of the posts, random thoughts by me and more.  See you there!

Image: Idea go / FreeDigitalPhotos.net