The 5 Biggest Mistakes Investors Make

As the year comes to a close, we’re looking back at a trading period full of extreme volatility… and extreme gains for those with the discipline to follow their principles. 

We also saw a tidal wave of new investors this year, who may not have any principles in place. Regardless of who you are, chances are you’ve made at least one of these mistakes in the past year.  

Read through the full article (and take notes!) to ensure that you don’t make the same mistake over again and stop yourself from wasting money in the New Year.

1. Being a Half-Baked Day Trader 

And no, we aren’t talking about cannabis this time. 

We’re sorry to break the bad news to many of the self-made Robinhood investors out there, but day trading is not a hobby, it’s a full-time job. If you want to make money by actively buying and selling shares in public companies, you’re going to have to commit to it. 

When trading on technical analysis, the difference of a few minutes could mean making money, or losing it all. Day trading is a form of technical arbitrage in which analysts try to take advantage of small, short-term price fluctuations for incremental gains. 

Additionally, the failure rate of day traders (aka those who lose more than they make) is estimated to be around 90%. 

Day trading is not the unstructured purchase and sale of securities whenever you feel like it, based on “intuition” or a recommendation. 

So, how do you break this habit? 

Decide on your approach to investing and stick to it. If you want to be a day trader, commit to it and start learning how to do it properly. If you want to be a long-term investor, make sure that your decisions reflect longer timelines and focus on the company, not on the stock price. 

Speaking of which, the second mistake that we keep seeing is… 

2. Trading Based on Charts 

Let’s talk about irrational investor psychology. 

Investors will hear about a company, look at the weekly chart, see it go up, and consider that a good enough reason to invest. When it starts coming down, they panic and sell, losing money on their investment. Then, when it goes up again, they’ll re-enter at a higher point. If you’re doing this, you’re allowing others to take your money as they game the system. 

Managing your own finances requires the ability to stomach volatility, especially when considering investing in small-cap companies. Take the stoic approach and manage your excitement and fear well, or else you’ll continue making this mistake. 

When dealing with your money, make sure that you know what you’re investing in and choose wisely. Make investments based on the underlying company, not the stock price. 

If a company is going up but you don’t believe in it, don’t invest! If a company that you do believe in is going down but nothing within the underlying business has changed, hold tight (and even consider purchasing more!). 

Be sure to manage the emotional side of investing and stay true to your thesis. 

If you’re following these tips and making money, you’re going to want to investigate the next mistake. 

3Not Utilizing Tax-Advantaged Accounts 

This is general information on capital gains to give you a better understanding of how tax-advantaged accounts work. Since everyone’s situation is unique, this should not be taken as advice and you should always consult a tax professional to determine what works best in your specific situation.  

For the purpose of this article, we’re going to be addressing Canadian accounts. If you’re from another country, look into the equivalents in your nation; you’ll thank us later. 

A surprising number of Canadians have never considered investing through their TFSA or RRSP, which means that they’ve never taken the government up on a tax incentive. Let’s start by defining what these accounts are and what they were created for. 

TFSA stands for Tax-Free Savings Account and it is a government-sanctioned account that provides tax benefits for saving your money. Basically, this is the government telling you to save and invest by giving you a chance to do so without paying taxes on the gains. 

If you invested in Company A at $0.10 and, over time, had that investment grow to be worth $1.00, you’ve made 10x your money. Normally, this monetary increase would be subject to capital gains tax. However, if you invested using a TFSA, this gain would be tax-free. Of course, there are terms and conditions around this that you should discuss with a professional but the big picture states that there are benefits here. 

An RRSP, on the other hand, is a tax deferral. RRSP stands for Registered Retirement Savings Plan and is an account that exists to help you save now, in order to have a better life in the future. This is a self-directed retirement fund that allows you to put aside money from your income today in order to pay preferred rates in the future. 

First, tax rates. As of 2020, Canadians are federally expected to pay 15% on their first $48,535 of taxable income, 20.5% on the next $48,534, 26% on the next $53,404, and so on. Let’s say you’re going to make $110,000 this year. You would be expected to pay $20,591.781 in taxes before deductions. If you defer $15,000 of your income by putting it into an RRSP, you can then take it out in a year in which you’re earning less money (such as after you’ve retired). If you choose to take it out in a year that has no other income, you will pay $19,055.582 on the total income instead. By doing this, you’ve saved over $1,500 in taxes. You can invest the money you put in here while decreasing the taxes you pay over time. 

If this is the first time you’re hearing about these accounts, take some time and learn more, right now. You’ll be happy you did. 

But before you go down the research rabbit hole, find out the next big investor mistake to avoid! 

4. Putting Everything on Red 

Companies shouldn’t be treated like lottery tickets and proper diversification should be practiced throughout your investing career. 

Actively managing your own portfolio is a valid strategy, as long as you make sure that you’re choosing more than one company to invest in. Don’t get us wrong, investing more heavily in companies that you have higher conviction in is a good thing to do, if you can be sure that you have a reason to do it. 

The more you spread out your holdings between companies, industries, and potentially even countries, the less you will feel fluctuations in one specific area. For example, if you’ve invested in a group of ten companies within financial technology and one of them fails, it will affect your portfolio, but to a much lower degree than if you had invested everything in them. 

While it may be tempting to put everything you have into a few companies that you believe in, this also exposes you to the possibility of losing everything you have if the company goes under. Remember that, contrary to what many investors like to think, stocks don’t always go up. 

Last, but certainly not least, we have our final investor mistake. 

5. Ignoring the Downside 

Everyone has heard the saying “you need to have money to make money” … but what about the options that don’t require any upfront capital like shorting or investing with leverage? 

Short selling stock in a company is the practice of selling shares that you don’t have, which you are obligated to purchase at a later date. When investors see companies that they believe are going to go down in the future, they can short the company… the issue with this, however, is that shorting a stock has unlimited downside potential. You can only make a certain amount of profit, but you could lose everything (and then some). 

When it comes to companies that many believe are overvalued (hello Tesla!), short-sellers have been absolutely smashed when they’re wrong. If a company that you invest in goes to nothing, you lose that entire investment but, when a company that you invest against explodes, you can be out a lot more money. 

Investing using leverage is something that we haven’t covered before, as it is not recommended and amplifies your risk exponentially. The most common form of leverage investing is a margin account, wherein an investor can borrow money from their broker to purchase an investment when they do not have the cash available to them. Typically, other assets in the customer’s account are used as collateral in this arrangement. 

If an investor makes money with their margin account, hooray! They can then pay back the borrower and enjoy the gains; however, if the investment doesn’t work out, their downside risk is amplified because they must pay back the original amount plus the amount that was lostand any interest and commissions they are subject to. In addition, the lender can issue something called a margin call, which means that they want their money back. A margin call means the borrower must either liquidate the investment (regardless of how it’s performing) or find the cash elsewhere to pay them back. 

The risks here are extreme and many investors engage with the practices without fully considering them, such as the Robinhood investor who took his life after seeing a negative $730,000 balance in his account.  

Everyone here wants to make money… just be sure that you weigh the downside risk as much as the upside potential. 

The Biggest Mistake Investors Make 

There’s one final mistake that investors make, which is more detrimental than all the others, combined. 

Forgetting to follow us on Instagram and TikTok and missing out on the freshest news, hottest tips, and best information on investing that you can find! 

Thanks for reading, now let’s go get ready for 2021.

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