9 common investing mistakes to avoid in the stock market

14 December 2023 by National Bank Direct Brokerage
A young man and a young woman investing safely.

For some people, investing in the stock market can feel overwhelming. However, with the right knowledge, your investment journey can be a straightforward and financially rewarding process that will help you grow your assets. To help get you started, here is a list of nine common mistakes that self-directed investors can avoid making.

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1. Not investing

It may seem obvious, but if you stay on the sidelines, you simply won't see the benefits. Yes, investing does come with its fair share of risks. However, by choosing not to invest, you can miss out on the potential for growth, beating inflation and benefiting from compounding returns that securities can offer.

How to avoid this mistake – Start your self-directed investment journey now

Self-directed investing doesn't have to be about stressing over multiple screens and monitoring buys, puts, sells, and holds with brokers in New York or London. For many investors, especially those who are not full-time day traders, investing is a relatively sedate, long-term process. It involves choosing investments thoughtfully, monitoring them regularly, and watching them grow slowly and steadily.

Investing is important because inflation erodes the purchasing power of money over time, causing it to lose value. This typically happens when you keep your money in a low-yield savings or chequing account. Money stored this way will not keep up with inflation, resulting in a decrease in its real value.

Just as the cost of living increases every year, your savings depreciate if they are not generating compound interest, dividends, or returns that keep up with the rate of inflation. A considered, long term investment strategy not only beats inflation, but it can also create wealth, and help you save for retirement. Therefore, starting your investment journey early in life is a great way to grow your wealth and build a more stable financial future. There is no “best” moment to start investing: the best moment is now.

2. Not making a plan

Having investment goals and a roadmap are key components in achieving personal financial objectives, such as saving for retirement, buying a home, or funding an education. Buying securities blindly or based on rumors instead of having an investment plan or clear goals can cause a multitude of problems in the future, such as financial struggles. So, you should not listen to your brother-in-law who claims to have the best investment ideas.

An investment plan with specific goals and targets helps investors align their investment strategy with their time horizon and risk tolerance. It also allows them to make more informed decisions about the right securities to choose and how to efficiently diversify their portfolio based on their personal goals, time horizon, and risk horizon. A well-crafted plan also serves as a benchmark for measuring progress and for making adjustments as needed.

How to avoid this mistake – Develop a plan of action before investing

Before committing to any securities on the market, an investor should determine where they are in their investment life cycle. Are they risk-averse, entering the workforce, looking for a low risk, low return investment? Or, are they a risk-seeking investor with a solid portfolio, looking for significant gains but prepared to shoulder a loss if their market play doesn't go as planned?

Click here to assess your investment profile.

In addition to determining your investment profile and plan, an investor should also take into consideration the type of investment account that will best suit their needs now and in the future. Non-registered, margin, TFSA, and RRSP accounts all have distinct advantages and limitations. Certain accounts are better suited to particular types of securities. So, it's important to assess your financial profile and determine if you will be using the account to manage stocks, ETFs, investment funds, options, bonds or GICs.

It's also important to strike a balance between risk and reward. If you need to, seek professional financial advice with National Bank’s experts to help you develop an investment strategy that’s in line with your financial goals and risk tolerance.

3. Investing in companies without researching them

Investing in companies you don't understand is simply reckless. Buying securities without doing the research and due diligence can result in a money-losing proposition that also exposes you to a host of other unnecessary risks.

How to avoid this mistake – Do your research and use authoritative sources

Before making any buying decisions, self-directed investors can use the different research tools that their direct broker makes available. Authoritative and credible analyses and reports available online provide investors with ratings, price targets, and other valuable information about the company and its future prospects.

Knowledge is a powerful resource, so information that helps you better understand what the company does will also help you make more informed and considered buying decisions.

NBDB's online platform has the resources for you. Consult the available analytical tools page for more information.

4. Failing to diversify your portfolio

Putting all your eggs in one basket is never a good idea when it comes to building a resilient portfolio. Markets can be volatile, and changing economic factors can have a significant impact on certain sectors or industries while leaving other areas relatively unscathed. By focusing your investment portfolio on only one type of security or one industry, an investor runs the risk of taking a significant hit if things turn sour in that sector of the economy.

How to avoid this mistake – Create a diverse and resilient portfolio of assets

Diversify your portfolio. Look for different asset classes such as stocks, bonds, REITs, and cash equivalent industries to spread risk more effectively. Diversification not only helps reduce risk when markets take a hit, but it can also help optimize returns over time. Investors also have access to alternative investments that can provide additional diversification benefits and manage risk

5. Not being patient

Patience can test our resolve and when it comes to our hard-earned money, it might be difficult to sit tight as markets swing down instead of up. Seasoned investors know that patience is one of the important qualities to a successful investment strategy.

How to avoid this mistake – Remember that markets will rebound

Investing involves risk but it is important to remember that market volatility can work both ways: what goes down inevitably goes back up. That is why it is important to avoid making hasty decisions based on short-term market movements and on emotion.

It is important to stick to your strategy and give your investments time to perform and grow. Remember that, for the average investor, the investing process is part of a long-term strategy. You must be prepared for fluctuations and the possibility of temporary declines in the value of your assets. A solid strategy typically involves taking into account the time that is needed for an asset to mature before you will be able to realize its full potential. In general, markets go up more often than they go down. Furthermore, not only do markets rise more frequently, but they tend to increase to a higher magnitude than the drops.

Progress of the stock market

Graph demonstrating S&P/TSX total return over the last 10 years

6. Making investment decisions based on emotion

New as well as seasoned investors can sometimes make important investment decisions based on emotion or 'gut feeling'. As many of us already know, letting emotions such as fear or greed dictate our decisions does not typically result in a good outcome. The same principle applies to your selection of securities: investing based solely on emotion can lead to financial disaster.

How to avoid this mistake – Invest objectively

Avoid making impulsive choices based on hearsay or short-term market fluctuations. By investing objectively, investors are driven by rational decisions and fact-based choices. Investors need to maintain a long-term perspective and stay focused on their financial plan. It can help to set a price limit for them to sell or acquire a security, to avoid selling on a whim or making a compulsive purchase. Minimizing emotional biases and making informed choices may significantly increase your chances of reaching your financial goals.

7. Ignoring your risk tolerance

As a first trade, going all-in on a penny stock might not be in your best interest. You're more likely to end up losing your shirt! On the other hand, sitting on the sidelines during a bull market is not the way to go either. That’s why finding the right balance between risk and reward is a critical component of any thoughtful investor's strategy. 

How to avoid this mistake – Determine and respect your risk tolerance

It is crucial to assess individual financial goals and time horizons to create a diversified portfolio that provides a reasonable chance of achieving long-term financial objectives while managing the level of risk you can or are willing to shoulder. Investing beyond your risk tolerance not only leads to stress, it can also drive panic selling during market downturns. It’s important to assess your risk tolerance and align your investment choices accordingly.

Taking a conservative investment approach may offer stability and less volatility, but it usually also comes with lower, more sluggish returns over the long term. Playing it too safe can be less appropriate for younger investors who have a much longer time horizon to weather market fluctuations.

That is why working from an investment plan that allows for a degree of flexibility based on changing market conditions can open the space for taking a more aggressive approach when markets are moving up and stepping back and taking a conservative approach when things slow down – a strategy that allows for dynamic and thoughtful investment choices.

8. Investing money you're not prepared to lose

As we have seen before, investing always carries a level of risk. To avoid finding yourself in a vulnerable position, it is wise to never invest money that you aren't prepared to lose. Though risk can vary significantly, the chance of losing most or all the money you invested is always a possibility.

Investing in the stock market can involve risk and choice, and the consequences of a failed investment strategy can lead to financial hardship, emotional stress and forced liquidation.

Nevertheless, people who choose to invest in equities have more ways of mitigating their losses and more resources at their disposal to make strategic and informed decisions. Over the long run, investing in the stock market generates positive expected returns on average.

How to avoid this mistake – Set aside some expendable investment money

For those starting their investment journey, a good first step is to set aside a cash cushion  This is a simple and wise strategy to follow. If the market tumbles and you lose your expendable investment money, the consequences should not be too financially dramatic, given that you allocated a proper amount to this fund. If the market moves in your favour, you will be able to reinvest any investment income and see the value of your portfolio grow. It all comes down to diversifying your investment holdings.

9. Following trends

A temptation for many investors, particularly those new to stock trading, is to jump on the bandwagon and follow some investment trend or fad. However. trends tend to be short-lived and driven by market hype. Self-directed investors should do their due diligence and be well-informed by conducting appropriate research before making any investment decisions.

Before following a trend and purchasing the stock, investors should be asking themselves if the stock aligns with their personal investment goals, and if their portfolio can afford to carry the loss if the security moves in a negative direction.

How to avoid this mistake – Consult a reliable source when doing your research

Don't simply rely on the advice of a relative that may have little to no investment experience, or on something you may have heard online. Make sure you corroborate any information with an authoritative resource, such as the NBDB website, which provides you with a wide range of helpful content as well as tools on the secured platform (sign in to access) that provides stock analyses, reports, and ratings.

Investing in the stock market is a great way to see your hard-earned money grow and a productive method to save for retirement, to buy a home, or to fund an education. It is an effective way to put money aside and beat inflation, but it is important to remember that there is always a risk of losing money when investing in securities. Determine your risk profile, make sure to do your research using the free and authoritative resources on the NBDB site, and start investing!

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Key takeaways:

  • There are several mistakes self-directed investors can avoid such as not investing, not making an investment plan, or ignoring their risk tolerance.
  • An efficient way to begin your self-directed investment journey is to have clear goals and start investing as soon as you have developed a plan of action and researched the companies that interest you.
  • A competent investment portfolio should be diversified, be based on your risk tolerance, and be able to bear common market volatility over the long-term.
  • Investing objectively and consulting reliable sources are important components to integrate into your investment strategy.

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