You are undoubtedly already aware of a few typical errors that can cause an investor to veer off course. There are obvious and preventable traps that can reduce your potential investment returns or cause excruciating losses, such as overreacting to market volatility, following investing trends, or putting off investing entirely.
However, a few less apparent errors may also prevent you from reaching your financial objectives. “It can be difficult to diagnose certain issues because they are hidden,” says Nitin Barve, CFA®, director of portfolio analysis and advisory tools. Misaligning your values with your actual holdings could lead to additional issues, and behavioral biases—which we all harbor but frequently fail to recognize—can also cause issues. Or you could be overlooking opportunities to save on taxes.
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Owning stocks you don’t want
Your portfolio might contain stocks that you would rather avoid. You may hold strong beliefs about how certain businesses and industries will be affected by long-term trends like environmental sustainability, artificial intelligence, or mobile technology, and you may wish to steer clear of stocks that may be negatively impacted by them. Or your decision about where to invest may be influenced by a particular set of values.
The risk increases if you decide to diversify your portfolio by adding stocks from index funds and actively managed funds that hold a large number of companies. These stocks may not share your values or opinions. Finding the ideal fund can be challenging, even if you specifically search for one that appears to invest where you want. Certain ESG funds, for example, may invest in companies that score highly in social, governance, or environmental aspects but may also have exposure to companies that perform better than average in social or environmental factors. Because you do not directly own or control the underlying securities, your control over this situation is, at most, restricted.
Overconcentration in individual stocks or sectors
When it comes to investing, diversification works. Individual stocks are typically more erratic than a broad portfolio of stocks. The bulk of stocks in the Russell 1000 Index have underperformed the index annually for eight of the last ten years, with an average of 29% of those companies experiencing negative returns annually. Investing your savings in a variety of assets can help prevent your investments from moving in tandem, particularly when the market declines.
However, even for portfolios that begin diversified, overconcentration can become a significant problem over time. You may own shares in a company or industry that has experienced significant growth, making up a growing portion of your portfolio. It is possible for you to own the same stock in multiple mutual funds, especially in “cap-weighted” funds where the largest market capitalization companies are given more weight. Those who work for public companies and receive stock options, also known as restricted stock units, as part of their compensation are also at risk of overconcentration, particularly if they hold shares of the company through other funds.
Work from the Schwab Center for Financial Research indicates that if any one stock makes up 10% or more of your overall equity exposure, you should be concerned. This includes your employers.
Investing Mistakes – Why Beginners Lose Money in the Stock Market
FAQ
What an investor should not do while investing in stock market?
Should you invest in stocks?
The market’s volatility is why you should only invest dollars you won’t need for five, if not 10, years in stocks. You don’t want to have to sell when the market or your holding has just crashed. Another downside of investing in stocks is that you can lose much, or even all, of your money if you don’t know what you’re doing.
What should I invest in If I’m a stock market investor?
What to invest in: Stocks are one option. You can also consider investment vehicles that provide exposure to the stock market. The stock market is the place that will deliver the best long-term return on your money.
Should you invest in stocks over the long term?
The good news is that the average bull market far outlasts the average bear market, which is why over the long term you can grow your money by investing in stocks. The S&P 500, which holds about 500 of the largest stocks in the U.S., entered bull market territory in October 2022 following a bear market that started in June of that year.
Should you sell a stock if the market crashes?
You don’t want to have to sell when the market or your holding has just crashed. Another downside of investing in stocks is that you can lose much, or even all, of your money if you don’t know what you’re doing. There are lots of ways to lose money in stocks, and lots of common investing mistakes you might make.