6 Investment mistakes to avoid

JonthumbPosted by Jonathan Weyermann on October 24, 2017 at 12:00 AM
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Each one of these are mistakes that have cost me various amounts of money over the course of my life. If I could impart onto you some things not to do when investing, this would be some things from my experience. 

1) Putting all your eggs in one basket

Before the financial crisis, real estate in Alberta was booming, and my Dad and I were trying to get a piece of the action. Not really understanding enough about the company we were investing with, we made a real estate investment that involved developing some land in the Crowsnest Pass to be vacation real estate. While this investment had many problems in retrospect (the Crowsnest Pass is not the hotbed of tourism as places actually in the rockies, the company was a ponzi scheme which took investor's money and funneled it to previous projects which were not paid for yet, and that vacation real estate is highly volatile), the biggest problem is entirely of our own making. We invested far too much of our assets into a single investment. The promised returns were good, but many businesses lent to by lending loop offer very similar returns, and you can diversify your investments among many businesses. We were pretty much going all in, and we lost nearly everything.

2) Chasing the daily returns of the forex or stock market

No matter which secret formula I purchased from so-called gurus, I couldn't successfully make profits chasing the markets using technical indicators. Perhaps there are some who can, but it's a lot harder than it looks. If someone could teach it you using a couple indicators for $49, or even $1049, almost anyone could do it. For a while I bought various systems to try to trade, and all I was doing was spending money on systems and losing money in trading accounts

3) purchasing automatic trading tools

Again, if there was a way to consistently profit in the stock market, using binary options, or forex (foreign exchange), would someone really sell it to you for $149? Most robots are scalpers or martingale systems, which often appear to make small profits, but will eventually take massive losses in the long term. Making a successful automated system isn't easy, as adding more rules (just like in any trading system) doesn't necessarily make the system better. Markets change too, and what was successful in the past often doesn't work today. If someone offers you a system that guarantees automatic profits, run away as fast as you can. 

4) Buying or selling options ahead of company earnings to make quick profits

Trading options for a such a short term window is highly speculative. Options can be part of balanced portfolio to hedge losses, and can be used to increase your trading leverage over the medium to long-term, but the movement of stock after earnings can be highly irrational. Stocks can move down on good news, for instance. Often purchasing options can produce losses if the stock doesn't move far enough in the desired direction, as the volatility decreases after the earning announcement, making the option much less valuable. Selling option can be lucrative before earnings, until you hit a really big move, and you have massive losses. I initially lost several thousand before I realized trading earnings through options is a sucker's game, because the implied value of out of money options will greatly decrease after earnings.

5) Making investment decisions based on the day to day news of companies and speculations thereof

Successful investors don't let the daily company news scare them, but are in it for the long haul. Speculations about production problems of the iPhone 8 isn't going to make long-term AAPL investors flinch, for instance. While following company news and technical charts can be exciting, if it causes you to touch your investments, it's probably not a good thing. Time in the stock market is usually more important than trying to time the market. Also, if every time you hear bad news you buy the stock's put options to safeguard from losing, you'll lose by default because you've paid for so much premium that it erodes your gains. Seemingly every week someone has a theory on why a stock will decline, and they're usually wrong. Same with the market as a whole. As they say, experts have predicted 23 out of the last 3 market crashes... 

6) Using mutual funds to invest

This one could easily be most people's costliest mistake over their lifetime. Like many others,  I diligently invested in mutual funds,  not fully understanding the management expense ratio of about 1.86% I was paying. In fact the average management expense ratio in Canada is 2.35%. This could cost you hundreds of thousands over the course of your life,  as every year 2.35% of your portfolio is lost to fees. The solution is to use a self directed account and purchase the much more cost-effective ETFs (exchange trades funds). I use Questrade, which doesn't charge a commission to buy ETFs. If you use the code 456524554408337 when you sign up, you will receive a sign up bonus, depending on the amount of money you deposit. If you currently use mutual funds, especially in Canada, the fees you pay are a huge drag on your investment, and you owe it to yourself to to explore the alternatives.



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