Everybody makes mistakes. The difference between success and failure is how you deal with those mistakes. Nowhere is this more prevalent than in investing. Today I will highlight 3 of the most common mistakes I see investors make, and hopefully this will help you avoid the errors so many others have made.
1. Waiting to Get Even
It is common for investors to buy a stock that declines in value and then, regardless of underlying fundamentals, hold the stock until it at least gets back to the price they bought it for. Many people hate the idea of selling a stock at a loss, so they may hold on to a particular stock too long while other opportunities pass them by. Behavioral finance describes this as a cognitive error. By failing to sell certain stocks, investors can lose in two ways. First, they can hold onto the stock as it continues to decline in value and possibly ends up worthless. Second, there is an opportunity cost, where the stock could have been sold and proceeds reinvested in a stock with more upside that make up the value lost in a more timely matter.
No time was more evident of this than the dotcom bubble that burst in 2000 and led to a steep bear market. Many investors froze, not knowing what to do and did not sell until the value of their portfolio had been cut in half. Read more »