There seems to a myriad of investing mistakes that distract our focus, make us buy and sell at bad times and reduce our ability to become richer. I mean, what's the sole reason people invest?
To make money.
I want to tackle two mistakes right now that usually are thought of as "rookie" investor mistakes, but I would say that there are still people with a good amount of experience who still fall for them. So don't think you're alone if you make these yourself. Many times the "newbie" mistakes are psychological because mostly investing is done through emotion.
Avoiding these two big mistakes can help you earn more, or at least reduce your losses so that you have more money later to invest in other stocks.
Mistake #1: Market timing
When the market is making new highs, like the ASX recently, the fear that the market will sell off badly keeps people from buying stock and making money from extended bull markets. They sell out and the market continues to rise for several years to come.
Oppositely, some investors get too spooked after a bear market. They hesitate to get back in, sometimes for years, and miss out on really cheap stock opportunities. The most profitable times to buy in the last five years were at the lows of the GFC in 2009.
REA Group Limited (ASX: REA), which operates realestate.com.au, the number one property search website, got cut in half in share price from $7.50 to $3.00 in 2008 – 2009. Those who grabbed up the stock on the cheap and held onto it until now have shares worth $47.92 – up more than 15 times in five years.
Solution: Stay invested for the long haul through market ups and downs. Buy good quality companies and have cash ready to buy stocks when the market offers silly prices.
Mistake #2: Chasing the herd
The famous fund manager Peter Lynch once wrote:
Dumb money is only dumb when it listens to the smart money
New investors want to follow what professionals or "investing gurus" are doing. Or "everyone" seems to be buying a particular stock and making good money. Despite the fact that stock has risen so high already, new investors are out for a quick buck and that's when the money turns dumb. The earlier buyers make their money by selling their stock to the later ones. After that, the buyers fade away and the stock goes flat or begins to sink.
Solution: Fully research your stock picks before buying and know why you should buy (or not). You worked so hard to earn your money originally, so maximise its earning potential by doing your homework. Remember to investigate before you invest.
One stock that may be a good long-term investment is Insurance Australia Group Ltd (ASX: IAG). It is the number-one market leader in general insurance. It offers a mouth-watering 6.0% dividend yield fully franked. It has raised its dividend consistently since 2009 and right now is at an 11 PE, so it is perhaps well priced.
