What are the 17 investing mistakes?

Updated: Feb 24

February 10, 2021

Kathleen J. Owens - Fiduciary | Financial Planner

You've probably heard about the recent incident with Robinhood traders driving up the price of GameStop, and AMC stock to tank a hedge funds short position on these stocks. This incident made me think about Robinhood investors as a whole and how many may be making serious mistakes. Please, if you want to start trading stocks, please educate yourself first. Don't learn as you go, or it will be an expensive education. Once you've made a terrible trade, there's no do-over. You've lost your money. There are probably thousands of these painful mistakes happening on a daily basis.

So here's my round-up of the most common mistakes us advisors see on a regular basis.

Following the herd

The growth of the trading app Robinhood is a good, although tragic example of following the herd. This trading app has become popular with young, perhaps inexperienced traders. According to The New York Times, their average investor is thirty-one years old. Many Robinhood users have gotten caught up in the frenzy because the trading is "free" and many of the typical trading check points that are found on all other trading sites, are absent on the Robinhood app. A check point is there to make you pause, and ask yourself; is the information that I have entered correct, and do I want to proceed with this trade.

Investing in the stock market is serious business, but the app presents it like a game. One investor got hooked on the app due to its appeal and “free” trading and lost $850,000 through financing his trades by getting cash from credit card advances and home equity loans.

With young investors following their herd and ease of use of the Robinhood app, has resulted in a deadly combination, literally. Recently, a 20-year-old college student, committed suicide when he mistakenly thought he had lost $730,000 while trading options. He tried to get help and answers from Robinhood support, but his plea for help was unanswered. Robinhood has claimed that the college students’ messages were returned. Apparently, the student did not know that options trades are displayed negative until the trade has finalized.

Treating investing as a sprint rather than a marathon

Yes, it would be nice if we could get rich quick. Unfortunately, that’s really hard to achieve. Historically, day trading usually ends badly. Yes, some people are successful, but the majority are not. To create true wealth takes decades, not days.

Being an emotional investor

One thing you learn as a professional advisor is to keep emotions out of your investment decisions. Decisions should be based on data, your investment goals and your ability to take on risk. People get carried away with emotion when:

1. they have a loss and then try to “make-up” for the loss, which usually leads to more losses due to emotion-driven decisions.

2. They get giddy with their success and become over confident in their ability. To keep the emotional high going, they ignore the losses and focus on their wins.

Believing the lowest cost solution is the best solution

The past few years, there has been a fee war among the major broker dealers (custodians) to attract new customers. This has led to “no-commission” trades and low management fees (expense ratio) on some funds. Yes, investment companies should not gouge their customers. However, the cost of the technology that is needed for rapid trade execution of millions of orders per day that are error free and also protected from external threats, is substantial. Custodians invest billions on the technology needed and employ highly educated professionals to carry out this very exacting, highly regulated and high-pressure work. Instead of focusing on the fee, look at your overall gain. Yes, some funds have higher fees, but what does their return look like? I'll take higher fees any day if I can get higher performance.

You'll step over a dollar to pick up a dime

What this means is that you focus on the wrong thing, which costs you money. Yes, we all want to save money, and the usual way most people think that they are saving money is by doing the work themselves. You may think, "stock trading, how hard can it be?" The problem is, you don't know what you don't know". I remember a story that relates to this when I was a new financial advisor. There was another advisor in the office, Bruce, who had been an advisor for a very long time. He was very successful and had a lot of loyal clients. He was kind enough to give me his time and chat with me. One afternoon he waived me into his office. He asked me, "Do you do your own taxes?" I thought, "What does he think, I'm too dumb to do my own taxes?" I answered, "Yes, I do my own taxes. He gave me a slow smile, that only comes with wisdom, and he said;

"I want to tell you a story when I was new to the business. My manager called me into his office one day and asked me the same question. I answered as you did, and with that my manager said, I'm getting my CPA on the phone right now so he can do your taxes".

Bruce thought, I can't say no to my manager, so Bruce agreed to talk to the CPA. The CPA asked Bruce to send him the past three years of his tax returns, which he did. About a week later, the CPA called Bruce and said he owed him $700.00 and that he amended his tax returns and would be getting a $7,000 refund. Bruce then said, he never did his own taxes after that.

This story taught me, that even though I'm a financial advisor and I have to know taxes, it's worth it to hire an expert.

Hanging onto your losers

It’s a normal tendency to avoid losses. According to Daniel Kahneman, Nobel Prize winner in economic sciences; we fear loss twice as much as we relish success. That’s why some investors will hang onto their losers and not sell. By selling you are then locking-in the loss and admitting defeat. Investing needs to be free of emotion.

No plan

How will you get to where you want to go when you don’t have a plan on how you are going to get there? Professional advisors take a great deal of time creating investment plans for their clients. This is our starting point. The plan will be tweaked and adjusted along the way as the market changes and the client’s situation changes. We wouldn’t waste our time with in-depth planning unless it was crucial to achieving successful outcomes.

No trading strategy

As part of an overall investment strategy is to consider when to buy and when to sell. Most investors buy rather easily. It’s selling that’s the tricky part. That’s where your overall plan comes into play. Using stop-losses strategically, ahead of time, sets parameters on your trades and helps remove emotion from the sell decision.

Not fully understanding the investment you are buying

Not understanding what you are doing has been tragically illustrated by the suicide of a young trader that was using the Robinhood app to trade options, which the young investor had no experience with. Options trading is complicated and risky. The twenty-year old investor thought he was -$750,000 in the hole, because he did not understand how an option trade is displayed. The investor reached out to Robinhood for help and guidance, but he was ignored (as reported by The Wall Street Journal).

Investment products are complicated. Ever read the full disclosure document on some leveraged funds? Most people don’t, but if you did and you understood everything that was disclosed in the document, you would probably have second-thoughts about the investment. Most often investors will turn to investment news channels, chat groups, blogs or friends to learn of investment ideas. Just because others are investing in a particular stock or trading strategy doesn’t mean it’s a good investment for you.

Not Using Spreadsheets or Other Means to Track your Portfolio Performance

Your money is your future and you should treat it as such. Investing takes time. It’s not fun or exciting reading investment reports and reviewing spreadsheets, but it’s necessary. You can't keep it all in your head. With good records you can spot trends and chart your progress. If you don’t have the time or inclination to keep a keep a keen eye on your investments then you should hand over the task to someone who will. Many of us are not detailed orientated or good with numbers. Being a good investor requires both.

Panic selling

During a time of volatility investors will fall into the trap of reacting. Again, this goes back to having a plan. For example, if you were invested in the stock market in 2008, what did you do? Did you panic sell or did you sit tight and ride it out? Were you actions part of your pre-determined plan? When you work with a professional advisor, together you will develop a plan for just this kind of situation.

Risk, what's that?

There's this thing that's kind of important. It's risk. With risk, it can be hard to describe with words, so investment professionals use mathematical calculations. Investments have many measures of their risk, in mathematical terms, and it's important to understand what these measurements mean. Standard deviation, Sharp ratio, Beta, r-squared and Value at risk are some of the well known measurements of a stock's or a fund's risk. If you don't know what these measurements are and how to interpret them, you can get yourself in big trouble very quickly.