As much as we try, it's hard not to make mistakes when it comes to investing. Picking quality companies, holding them for the long term and ignoring short-term market yips are three ways to avoid most of the pitfalls, but here are a few things you should try and avoid:
Don't spend your dividends
It's easy enough to see share price growth as our target, and use the flow of dividends to pay bills or as extra spending money as it comes in. But reinvesting that cash can make a significant positive difference to your end goal, thanks to the wonders of compounding.
Over the past decade, Woolworths Limited (ASX: WOW) shares have seen a capital gain of 103%. But had you reinvested your dividends over that period, your return would have almost doubled – 194%!
Steer clear of "gunna" companies
It can be tempting to invest some of your hard-earned cash in those companies that promise much, but have failed to deliver over the long term.
Karoon Gas Australia Limited (ASX: KAR) saw its shares hit an all-time high of $12.10 in 2009, up from 50 cents ten years ago. But shares have since sunk to $2.51, and the future profitability of the company is in doubt, given the 55% crash in oil prices since June 2014. Karoon has yet to produce $1 worth of oil revenue despite being listed for 10 years – and it's a brave investor who thinks the company will produce the goods in the future.
Don't follow the crowd
Speculators have been jumping on board the iron ore express so far in 2015, particularly the junior iron ore miners like BC Iron Limited (ASX: BCI), Atlas Iron Limited (ASX: AGO) and Arrium Limited (ASX: AGO), which have rocketed up 34%, 60% and 35% respectively.
But iron ore prices appear to be stuck around US$70 per tonne, and could stay there for some time. At those prices, it's unlikely the miners above will be profitable. It could be a mad rush for the exits when they report their financial results in February.
Don't buy a stock you don't understand
When you see the latest hot stock on the ASX rocketing ahead, it can be tempting to jump on board. But unless you understand what the company does and how its business operates, you might want to steer clear.
I'd even argue that many small investors have very little understanding of our big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corp (ASX: WBC), the leverage they apply to their assets to generate returns, and the risks inherent in their business.
Don't blindly follow the experts
We've often said that it's important for investors to do their own research and make their own decisions based on their preferences rather than just blindly following the tips of the experts.
For a start, many of the 'so-called' experts aren't. Following their every move could be damaging to your wealth.
Above all else, if you follow some simple steps to investing, you should be well on your way to financial security.
