Updated March 10, 2016

5 Common Investing Mistakes (And How to Avoid Them!)

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We all make mistakes, but these common investing mistakes can destroy your portfolio. Here's how to avoid them.

For those of us who want to take care of our financial futures but aren’t investing pros, there are plenty of pitfalls. And the media rumor mill sure doesn’t make most regular people feel better about their investing decisions.

To help steer you on the right path—or to set your mind at ease if you’ve got it all figured out—we’ve put together some of the top investing mistakes that we see on a regular basis... and how to avoid them:

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Mistake #1: Paying Too Much Attention to the Stock Market

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Studies have shown that frequent trading in reaction to constant market swings tends to hurt investors rather than provide them with sustainable earnings.

One study found that day traders’ gross profits usually don’t even cover their own transaction costs, and that more than 80% of individual day traders lose money in a typical six-month period. A different study, out of the University of Massachusetts, found that individual investors tend to sell winning investments while hanging onto losing investments.

Translation?

You might think you’re being smart by tweaking your investments whenever the market surges or dips, but history shows that most investors buy high and sell low, despite their best intentions.

How to Avoid This Mistake:
The next time the market does something crazy, try to steel yourself against the urge to make any kneejerk trades, and keep your focus on your long-term goal.

Related: 23 Reasons Why You Should Invest in the Stock Market

Mistake #2: Paying Too Little Attention to Your Portfolio

On the opposite end of the spectrum, caring too little about the market’s impact on your portfolio can also be detrimental.

As certain kinds of assets (like stocks or bonds) perform better or worse than others, your target allocation (the percentage mix of various investments that you’ve chosen) will get out of whack. Inevitably, some investments will gain or lose in value more than others.

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Over time, you can drift very far from that your target allocation. Running the numbers shows that ignoring your portfolio for too long can skew your risk and hurt your returns over time.

How to Avoid This Mistake:
Aim to rebalance your portfolio at least every year to ensure your portfolio actually reflects your investing goals.

Related: Beginner's Guide to Investing in the Stock Market

Mistake #3: Believing the Pundits

Many people take the word of the various financial talking heads as gospel, but Jim Cramer isn’t going to suffer personally if you take his advice and your portfolio goes sour.

Although some stock tips might turn out well, others won’t.

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TV personalities make a living by talking up market fears and elation, and sounding like they know everything. Power to them, but one study found that the average accuracy of all pundit recommendations was 47.4%, which is a little worse than a coin toss.

How to Avoid This Mistake:
Remember, when everyone pours into a certain “hot” investment, the price of that investment increases and it becomes less of a steal. By the time these tips are broadcast to millions on television, they’re hardly the overlooked, well-kept secrets you’re hoping for.

Mistake #4: Trying to Beat the Market

When we talk about “beating the market,” we’re referring to earning more returns than a stock market index like the S&P 500.

When you try to find some rock star, runaway stock, you’re hoping to earn more than if you simply invested in the index itself. But statistically, the average individual investor will not beat the market.

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And, psychologically speaking, many of us fall prey to problems such as deciding a stock is well-priced by comparing its current price to the 52-week high without taking the time to see why it has fallen, leading us to buy inferior investments.

In addition to the chance that we’ll choose poorly and underperform the broader market, stock picking comes with way more risk than investing in mutual funds, because it concentrates your money in just a couple investments.

If your one main investment fails, all your money goes kaput.

How to Avoid This Mistake:
By contrast, if you invest in a well-diversified mutual fund, you’re getting a little bit of lots of different investments, which means that, if one of them fails, you have enough other stuff to cushion the blow.

Mistake #5: Ignoring Your Expenses

When you invest in a mutual fund, you’ll pay an expense ratio (the fees required to keep operations going for the mutual fund company). Although these fees often appear to be low, with many under 1%, they can add up over time.

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Let’s say you make a return of 5% in a fund. If that fund charges an expense ratio of 1%, you’ll only walk away with a 4% return. And remember that this will be subtracted from your investment even if the returns are negative for a given year.

How to Avoid This Mistake:
Expense ratios can vary greatly depending on the fund and the kinds of investments it makes, so remember to keep your eye on this number when you make your investment choices.

Bottom Line

The world of investing can be intimidating. Especially for those with a long time horizon (read: a long time before you need your money back, like if you’re a young person saving for retirement), the most powerful key is simply to dive in and start investing.

Time is your greatest ally, which leads us to the very worst investing mistake you can make: Not investing at all.

More from CreditDonkey:


How to Build Wealth in Your 20s

How to Invest in Stocks

How to Invest in Stocks


10 Smart Ways to Save $1,000 a Month

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