Investing is not trigonometry. There are no hard equations or formulas but our human side makes us vulnerable. Like anything we start that’s new we always look for quick results and if we don’t get them we get de-motivated and make poor decisions. Specifically, in investing, we chase high returns (and quickly), great dividends and long term growth. Investing is a long-term deal and its better to know that earlier then later. This week I will be looking at common mistakes that plague rookie investors and reasons to AVOID them.
Don’t think High Fees = High Returns:
If you’ve researched stock picks in the past you’ve realized there are so many companies listed on exchanges and it can be very difficult pinpointing the exact stocks that will grow at a modest 8-10% per year. You might opt for a mutual fund or index fund. However, many of these products come with steep fees of 2-3% per year on the total assets. They will also most likely charge you for withdrawing funds or changing plans. The funds are also never guaranteed to perform so even in a bad year when the market performs poorly and your portfolio loses value, fees will still be deducted reducing your portfolio by another 2-3%. Likewise, stocks are not guaranteed but the only fee you pay is commission to buy and sell. My brokerage firm charges 4.95$ per trade so in total I only have to make 10$ to offset the costs of my investment. With a mutual fund you need to get a 2-3% return on your investment EACH YEAR to offset costs.
On a 1000$ portfolio it must average 20-30$ per year to offset costs. To have a solid return your fund should generate a return of at least 7% annually to offset costs and inflation and give you a small profit.
Trading TOO Often:
In my personal experience this can be one of the most detrimental habits that will destroy your portfolio. One of the worst things for rookie investors is our expectations for returns. We are an impatient bunch expecting returns overnight. I don’t like using clichés but patience is a virtue and you need to be patient with your portfolio. If you jump from stock to stock not only will returns be hard to come by but you will erode your portfolio in a heartbeat. I remember in my 1st year of trading I had over 100 trades resulting in almost 500$ in investing fees. 4.95$ per trade may not seem much individually but as a group it stings.
Avoid Small Holdings:
In my personal experience, I try to keep my minimum stock purchase at 500$ or higher. At 4.95$ per trade – my investment costs roughly work out to 1% my purchase – so I only need the stock to grow by 1% to offset me invest costs. Anything above 1% stock growth is pure profit and my portfolio starts growing after that 1%. However, with smaller holdings such as 100$ the investments costs now come to 5% – so the stocks need to return a minimum of 5% before I start to make a profit. Don’t forget that commission goes both ways on buy/sell trades so you must factor that in.
Disclaimer: All of the above information is my own personal opinion. The examples are shown from my own personal experience. The figures shown are fictional and represent an approximation and average of the industry averages. Please do your research before choosing stocks.
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