If you are fortunate enough to have the money to invest in stocks, you may have made some money doing so. But you may also have made your share of money-losing investment mistakes. I know I have made plenty of such mistakes. Based on my experience, here are three that I would guess are pretty common:
- Not reading the prospectus. Too many investors buy stocks on tips from a broker or a TV stock promoter. They do not read the financial statements of a company. If they did, they would know about financial challenges, legal problems, industry uncertainties and other problems which could hammer their investments. But people don't read these financial statements, in many cases because they lack the financial education to make sense of the information.
- Not setting stop losses. People fall in love with a stock once they've invested. If the stock goes down, they hold on because they don't want to admit that they were wrong. Investors should set stop losses – if the stock falls 2% to 5% from the original price, they should sell. Most investors do not have the discipline to do this. But if they did, they would limit their portfolio risk tremendously. Would they also miss out on some opportunities? Probably, but more often than not, they'd save themselves losses.
- Confirmation bias. Decision-makers often tend to lap up information that reinforces their view of the world and ignore information that undermines that view.This so-called confirmation bias plays out in investor's portfolios every day. That's because if an investor buys a stock, he or she tends to look for information that makes them believe the stock will rise. Investors filter out any negative information. What they should do is ask an objective analyst to weigh all the pro's and con's and make a recommendation about what to do. But thanks to confirmation bias, most investors would ignore such advice anyway.
