Lesson 36: The 23 Biggest Mistakes Investors Make (And How to Avoid Them)

One of the greatest secrets to becoming a successful investor is to avoid the most common mistakes.

In several past lessons, we discussed how the average investor can fall victim to mistakes that end up really hurting his long-term returns.

For example, let’s look at this chart from J.P. Morgan, which shows how the average investor has performed vs. a range of other investment classes over the last 20 years. 

See the orange bar near the far right?

As you can see, the results are not good. The average investor underperforms nearly every asset class on the market and just barely outpaces inflation.


How is it possible that common investors can trail so far behind every other benchmark?

It’s because there are a range of simple mistakes, or traps, that investors tend to fall into.

For example, Raymond James analyzed the biggest mistakes that hold investors back and categorized them into five major areas: 

In our opinion, these are just a few of the mistakes that cost investors millions of dollars each year.

In this lesson, we’re going to help you avoid common mistakes and boost your long-term profit.

Before we jump in, we want to make one very important point:

Do NOT feel badly if you realize you make some of these mistakes. Every successful investor had to work to learn these lessons, and many did so the “hard way.”

Our goal is not to make you feel badly or highlight your mistakes. Not at all.

Instead, we want to help you understand these common pitfalls so you can elevate your investment knowledge, strategy, and decision making to the next level.

The fact that you’re reading this right now shows you’re already well on your way towards pulling away from the pack of common investors.

Let’s start by looking at the types of companies you choose to invest in.

In Level 4 of this course, we covered six different ways to find the best value, growth, dividend, small cap, large cap, and blue-chip stocks.

All of the profitable strategies we shared are backed by extensive research and testing.

However, many investors choose their stocks using a much simpler method. And unfortunately, that can cost them dearly.

Let’s start with two stock-picking methods that we think are BIG mistakes:

1) Only Buying Companies You Know

Investors are naturally drawn to buying companies that they already know.

Many investors seem to have an unconscious test for buying a new stock: “Do I already know the company’s name?”

This leads to buying companies such as General Electric (GE), Apple (AAPL), Netflix (NFLX), Tesla (TSLA), Google (GOOGL), Facebook (FB), Coca-Cola (KO), Johnson & Johnson (JNJ), and Bank of America (BAC).

However, there are nearly 9,000 stocks available on the U.S. market. By focusing only on companies you’re already familiar with you risk missing out on so many other choices!

Such focus limits your investing universe from thousands of stocks down to just dozens, or maybe hundreds, which is bound to hurt your investing profits over the long term. Especially because some of the best-performing stocks are companies most people have never heard of.

Ask yourself this:

“Am I holding the stocks in my current portfolio because they’re the best possible place for my money? Or am I giving them unfair preference because I’m already familiar with them?”

It’s easy to jump right to the big names that everybody knows. But sometimes it’s the lesser known or less exciting companies that make the best investments.

Try and keep an open mind and give equal consideration to stocks you’re familiar with and those that are new to you.

2) Buying Companies You Like

Similar to only buying stocks you’re familiar with, some investors make the mistake of buying companies they like.

It’s tempting to assume that companies we like will make great investments, but that’s not always the case.

For example, if an investor owns a Tesla car and absolutely loves driving it, he may go buy Tesla stock because he thinks they have a great product.

But there’s much more to a company than just a great product. And a closer look at Tesla stock suggests there are better places for his investment money.

Don’t confuse great products with great stocks.

It’s true that many great stocks have great products. But not all great products are sold by great companies.

Be sure to view your stocks through the lens of, “Is this a great company?” rather than, “Is this a great product?”

3) Buying Buzzworthy Companies

The third classic mistake investors make when picking stocks is rushing right for the most exciting, buzzworthy companies.

Story stocks like Tesla, Netflix, Facebook, and others can make great investments. But many buzzworthy story stocks are often overvalued and subject to high volatility.

Before loading up your portfolio with the most exciting companies, explore some of the pre-filtered stock screens we provide in Level 4 of this course to see what other stocks might be a better fit.

4) Owning Too Few Stocks

As we discussed in several earlier lessons, it’s important to own between 10-30 stocks so that your portfolio isn’t too concentrated in just a few positions.

However, some investors choose to buy just a handful of stocks, which highly concentrates their risk.

Even the best investors only pick winners 50% – 70% of the time, so it’s important to place enough “bets” that you don’t risk picking just a few stocks that end up being “losers.”

Research has shown that 10-15 stocks is the minimum needed for proper diversity and 30 or more stocks ends up being a lot to research and manage for most investors.

We’d encourage you to own somewhere between 10-30 stocks for each investment strategy you’re pursuing.

For example, if you want to invest in dividend stocks in one account and high-growth small cap stocks in another account, it’s fine to buy 12 dividend stocks in the first account and 10 small caps in the second account.

Just don’t fall into the trap of putting all your money into five stocks. That’s a recipe for poor long-term performance.

5) Forgetting to Rebalance

Forgetting to rebalance is one of the costliest mistakes an investor can make.

As we’ve covered in several previous lessons, you want to own between 10-30 stocks in your portfolio so that you’re properly diversified.

A key part of diversification is making sure the money is spread relatively equally across the 10-30 positions that you hold.

Owning 10 stocks, but having 90% of your money concentrated in just one stock means you’re NOT diversified.

While your portfolio might start with a healthy balance, this has a tendency to shift over time. Winners get bigger and losers get smaller, which will throw your balance out of whack.

For example, imagine you invest equally in 10 stocks and one of them gains dramatically in the first month while the others decline. If 25% of your money is now concentrated in that one winning stock, you’ll want to consider rebalancing.

Rebalancing involves adding to or selling off your positions so that they become more evenly balanced.

In the example above, you might consider trimming the winning position back to 10% of your portfolio.

If your portfolio balance shifts too much, your returns will be overly influenced by the 1-2 stocks that now hold most of your money.

Always keep an eye on your portfolio balance, it’s a key part of steady long-term returns.

6) Forgetting to Reinvest Dividends

If you’re investing in dividend-paying stocks, it’s critical you have a plan to handle the dividend payments.

Some investors choose to have dividends deposited in their portfolio as cash. This approach is fine as long as you actively reinvest the dividend cash on a regular basis.

Remember, over time the stock market tends to go up. Having dividend payments sitting in cash, rather than invested in the market, means you’re missing out on gains. Over time, this could come back to haunt you.

Alternatively, some investors choose to have their dividends reinvested into the security that issued them. This feature is called a DRIP (dividend reinvestment plan) is offered by many brokerages. It allows you to automatically buy partial shares of a stock with its dividend payments.

This means your dividends never build up in your account as cash, but are instantly plowed back into the company that paid them.

A DRIP plan makes dividend reinvestment much easier, and it allows you to steadily buy more shares of the stock at various prices. However, it carries a risk of throwing off your portfolio balance over the long term.

As dividends are plowed back into buying more shares, the dividend-paying positions can get larger and larger. You may find that over time their position size has become too large relative to the rest of your portfolio.

The answer is simply to rebalance your portfolio (which we covered above).

When it comes to handling dividends, either approach is fine. You can accept dividend payments as cash and regularly invest the cash into new stocks you purchase OR you can opt for a DRIP plan so dividends are automatically reinvested into the stock that paid them.

Just make sure the dividend cash is working for you in the market.

7) Buying High, Selling Low

Every investor is familiar with the classic adage, “Buy low, sell high.”

Seems simple, right?

However, many investors actually do the opposite! They buy when stocks are high and sell when stocks are low.

For example, look at this incredible chart from Raymond James

It shows that in the year 2000, right at the peak before the market crash, investors poured money into stocks and pulled money out of low-risk bonds. Over the next two years, the market declined by -11.89% and -22.10%. Investor were “buying high.”

Then, in 2002, once the market crash had ended, investors pulled their money out of stocks and poured it into low-risk bond funds. Over the next two years, the market rallied for a +28.68% gain followed by a +10.88% gain. But investors missed out because they “sold low.”

Similarly, after the market crash of 2008, investors poured out of stocks and into bonds. The market rallied +26.47% the next year. Another example of “sell low.”

There are several reasons why investors tend to make this “buy high, sell low” mistake. And we’ll cover each of them below.

8) Performance Chasing

Some investors have a bad habit of “performance chasing”, which involves making investment decisions based on what has recently performed well.

This commonly shows up when investors buy into mutual funds or stocks that have recently reported large, market-beating gains. It can also work the other way, when investors bail out of investments that have recently performed poorly.

In general, basing investment decisions on how things have recently performed is not a good strategy.

It’s one of the main reasons investors tend to “buy high” (pouring money into investments that are performing well) and “sell low” (abandoning investments that are performing poorly).

It’s much more powerful to understand WHY something has been performing the way it has than to just assume it will continue in that direction.

9) Trying to Time the Market

We’ve discussed timing the market several times during this course, so we’ll summarize here.

It’s very hard for investors to correctly time the market, and in trying to do so they often miss out on big gains.

For most investors, we wouldn’t recommend trying to jump in and out of stocks based on short-term forecasts. Instead, invest in the best stocks and always be searching for better alternatives.

The one exception we’ve covered is avoiding recessions based on forecasting economic data. Done correctly, investors can spot painful economic slowdowns in advance and adjust their strategy accordingly.

10) Fearing the Stock Market Crash “Bogeyman”

Some investors are terrified of the stock market crash “bogeyman.”

They fear that every normal market dip is the beginning of a massive crash. This thinking usually leads to costly mistakes, such as missing out on long-term gains in the market.

Our philosophy is to stay invested and accept normal market turbulence as a healthy part of investing and an opportunity to buy good stocks on the cheap. Plus we use economic forecasting to try and spot the big declines often associated with recessions.

11) Having a Short-Term Focus

Over the long term, stock market performance is pretty consistent. The S&P 500 tends to return between 7% – 10% per year, on average, over time.

However, in the short term, performance tends to be all over the place.

As you can see in this chart from Raymond James, the longer you hold stocks, the more consistent the returns: 

Look at how tight the bar is for 20-year holding periods of small and large stocks. The range of possible returns is pretty predictable.

However, for the 1-year and 5-year holding periods, returns are very wide.

Investors with a long-term focus tend to make steady and consistent investment decisions that lead to big profits over time.

However, investors that are hyper-focused on the short term tend to struggle to perform well because they’re always trying to earn big profits right away.

One reason for this classic mistake is not having realistic expectations about how the stock market works.

12) Having Unrealistic Expectation

We love this quote from Nicholas Vardy:

“The average investor only wants one thing: the right stock pick, one that will go up forever, starting immediately.” 

Unfortunately, that’s just not how investing works.

If you play the game on the stock market’s terms, you’re very likely to make a lot of money over the long-term.

But if you try and bend the stock market to play the game YOUR way (fast, immediate returns, forever), you will likely be very disappointed.

As discussed throughout this course, the stock market is very predictable over the long term. If you can align your expectations with how the market has behaved over the long term, you’re likely to be happy with the profits.

But when investors have unrealistic expectations about how the stock market works, they’re often frustrated and disappointed by their results.

If you can follow proven strategies, avoid mistakes, and be patient, the market will reward you handsomely over time.

13) Looking at Your Investment Portfolio Too Much

We believe in active investing.

That means rebalancing your portfolio when needed, reinvesting dividends, and always making sure you’re holding the best possible stocks for your investment strategy.

That involves frequently checking your investments, monitoring the market, and researching new stocks.

However, be careful not to look at your portfolio too much. It’s a common investor mistake to check your stocks too frequently and fixate on the daily (or hourly) changes in value.

Watching your portfolio’s every move up and down tends to activate the emotional pathways of the brain, fueling excitement around gains and disappointment around losses.

And once our emotions around money are excited, it’s MUCH harder to make rational decisions that will help us over the long term.

It’s good to stay active and engaged with your portfolio. Just be careful not to hyper-focus on your short-term returns, as it can hurt your ability to make solid choices for the long term.

14) Watching Too Much CNBC

Similar to checking your portfolio too often, some investors make the mistake of watching CNBC (and all other financial media) too often.

Financial media is often designed to stir up the emotional parts of your brain to keep you interested, rather than help you make better investing decisions.

In addition, many of the talking heads on CNBC are NOT actually trying to accurately predict what’s coming or correctly assess the prospects of a stock.

Not at all.

They’re trying to project confidence, stir emotion, and build your interest so you’ll keep watching their show and boost their viewership numbers.

It’s good to stay up to date on the markets, economy, and your investments. Just don’t pay too much attention to the daily excitement of the “talking heads” on TV.

15) Craving Action

Many investors have a desire for action.

We want to see our stocks (and profits) go up, and if they’re taking too long we have a tendency to dump them and find something better.

Sometimes that’s a smart choice. But often it’s driven by impatience.

We walked through two detailed lessons on when to buy and sell your stocks and there are many good reasons to abandon a position and move to something better.

Just be sure your trading decisions aren’t driven by impatience or a desire for action.

16) Abandoning a Good Strategy Too Quickly

Good strategies take time to play out.

There are many well-researched, proven strategies that deliver incredible profit over time. But they’re not overnight guarantees.

All good strategies have stretches of strong performance and stretches of poor performance. Over time, they tend to outperform the market and make investors lots of money.

However, along the way many investors can become impatient and abandon the strategy.

For example, value investing takes time. Often undervalued stocks or industries are “out of favor” with Wall Street and even though a savvy investor may spot that today, it can take a long time for the market to catch on.

Investors sometimes make the mistake of abandoning a good strategy because it’s taking too long. What usually happens next is the strategy finally starts to work and the investor kicks himself for giving up too soon.

As we discussed above, the market performs on its own terms. And our best hope is to profit from the strategies that work over the long-term.

If you have a good strategy and own well-researched stocks, be patient. Over time you’ll be rewarded.

17) Taking On So Much Risk You’re Not Sleeping

If you’ve invested in a way that keeps you up at night, you might want to revisit your strategy.

Sometimes, in an attempt to earn big profits quickly, investors take on so much risk that it affects their day-to-day life.

For example, some investors will pile a lot of money into a penny stock right before its earnings announcement in hopes the stock will skyrocket.

Strategies that are highly risky and based mostly on chance or luck are basically gambling. And that’s not a good way to build wealth in the stock market.

If your portfolio makes you nervous, explore ways to make it a better fit for your risk / reward goals.

Perhaps you’d feel better buying high-dividend stocks? Or blue-chip stocks? Or maybe you should own more positions, so that your money isn’t so heavily concentrated in just a few stocks?

The bottom line is if you find your investments are “keeping you up at night”, it’s worth reexamining your approach.

18) Getting Greedy

There’s an old saying on Wall Street that goes like this:

“Bulls make money, bears make money, pigs get slaughtered.”

It means that both bullish and bearish investors will make money in stocks over time, but greedy investors (“pigs”) will do poorly.

This ties in with the last few points above on understanding the market and making smart decisions for the long term.

Investors who get greedy have a tendency to get “slaughtered.”

19) Assuming a Stock with a Low Price Is Undervalued

The price of a stock, on its own, tells you absolutely nothing about whether it’s undervalued or overvalued.

We cringe when we hear investors say, “Oh, that stock is trading for $150, that seems expensive.”

Or, “Hmm, General Electric (GE) is only $6.70 per share? Sounds like they’re undervalued.”

The stock price only matters relative to the value of the underlying company. You have to ask what you’re getting for the price to decide if it’s cheap or expensive.

For example, shares of Berkshire Hathaway (BRK.A) were recently trading at $310,000 per share whereas shares of small cap pharmaceutical stock SCYNEXIS (SCYX) were recently trading at $1.19 per share.

We could easily argue that Berkshire trading at $310,000 ($238B in sales and $48B in income over the last 12 months) offers a much better value than SCYNEXIS trading at $1.19 ($0 in sales and -$31M loss in income over the last 12 months).

It’s not about the price of the stock. It’s about how much you get for what you pay.

Value investors try to pay a little to get a lot.

20) Assuming a Stock That Has Sold Off Is Now Undervalued

This is another common mistake. Investors assume that because a stock has sold off, it MUST be undervalued.

The thinking goes like this: “Oh wow, XYZ stock is down -25% from last month. It must be a good undervalued buy now.”

Maybe. Maybe not.

Remember, value isn’t the price you pay. It’s how much you GET for how little you pay.

When hunting for undervalued stocks, companies that have sold off are fine to consider.

But very often, they’ve sold off for a good reason.

It’s very possible that the underlying value of the business has declined more than the stock price has declined. In that case, the stock is actually OVER-valued compared to before its selloff.

The bottom line is you have to examine what you’re getting for what you’re paying. Just because the stock is cheaper than it was doesn’t mean it’s now worth buying.

In fact, high-quality companies rarely sell off dramatically because they have stable financials and investors have confidence in their ability to overcome short-term issues.

Warren Buffett has a great quote to sum this up.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

21) Blindly Following a “Buy and Hold” Strategy

In a recent lesson, we discussed at length why “buy and hold” is bad advice.

Put simply, you should make buy and sell decisions because you always want to own the best stocks on the market.

Buying something and then simply holding it forever is an overly-simplistic strategy that will hurt your long term returns.

Now, there’s nothing wrong with holding a stock for a long time if it’s still a strong performer. We’re not suggesting you should always buy and sell stocks rapidly.

Instead, your holding time should be based on the quality of your stocks. If they’re still the best companies for your investment strategy, then hold tight. Otherwise, considering replacing them with something better.

22) Holding Losers for Too Long & Selling Winners Too Soon

Some investors have a tendency to sell their winning stocks too quickly so they can lock in a gain and hold their losing stocks for too long so they can avoid a loss.

For example, imagine an investor buys two stocks in his portfolio, one of which quickly goes down by -25% and the other quickly goes up +25%. The investor will happily sell the +25% gainer and marvel at his profits, but he holds on to the -25% loser, hoping it will “come back up.”

His decision to hold the loser stems not from a thoughtful strategy or analysis, but because the investor doesn’t want to experience the emotional pain of realizing a nasty loss on his stock.

So, rather than sell the position and allocate his funds to another stock, he holds on until the loss becomes small (or becomes a gain), at which point he can sell without feeling badly.

The problem with this strategy is that the money he invested has already shrunk by -25%. Leaving it in that stock or selling out and allocating it elsewhere doesn’t change the fact that every dollar invested is now only 75 cents.

The amount his personal investment in the stock has gained or lost is pretty much irrelevant as to whether something is a good investment going forward.

Every time you trade you should ask yourself, “Is this the best possible stock I can allocate my money to?”

The answer to that question should drive most of your buy / sell / hold decisions.

The most damaging example of this mistake is an investor who would rather hold onto a losing stock until it gains +20% back to where he bought it than take the loss and allocate the money to a stock that gains +30% over the same time period.

Clearly, the 30% gain is much better! But by waiting for his losing position to return to breakeven, he can avoid the pain of “locking in a loss.”

This idea of “locking in a loss” is an illusion. The loss has already happened, regardless of the trading decision he makes.

The key to outsmarting this type of psychological loss aversion is to simply ask yourself:

  • “Is this the best possible decision I can make given the data I have available today? Or, is this decision being influenced by a fear of losing money?”
  • Another key question to ask is, “Across my entire portfolio, over long periods of time, will this strategy result in the best possible overall returns?”

That should help you overcome the pain that comes from occasional losses in areas of your portfolio.

And remember, losing money on some stocks and during some stretches of time is an unavoidable part of stock market investing.

It will take some time and practice, but soon you’ll start to spot decisions that are driven by logic vs. decisions that are driven by fear.

23) Ignoring Relative Performance

Relative performance is the measure of your own portfolio performance compared to a relevant benchmark. When you outperform the benchmark, it’s called “beating the market.”

For example, if your stock portfolio gained +10% last year, was that a good return?

It all depends on how the market performed overall.

If the S&P 500 only gained +5%, your performance doubled the market – that’s a great year!

But what if the S&P 500 gained +38% last year? Suddenly your +10% doesn’t look so hot.

It’s critical that you compare your returns to a relevant benchmark.

What do we mean by relevant?

Whatever type of stocks you’re buying, pick a benchmark that focuses on the same type of stocks.

For example, if you’re buying small cap stocks, compare to the Russell 2000 small cap index (IWM).

If you’re buying dividend stocks, compare to a dividend ETF like iShares Select Dividend ETF (DVY).

So, why is it important to compare to a benchmark?

Too many investors measure their success only by whether or not they make money. This is one of the biggest investing mistakes we’ve seen.

There are years where the market declines heavily, and declining less than the market is a huge victory. It means that over the long term you have a good chance of beating the 7% – 10% average annual return the market usually delivers.

But on the flip side, considering a small +10% profit a “good” year when the market soared by +38% means that over time your portfolio will likely fall short of the 7% – 10% average annual returns of the S&P 500.

Beating the market and earning strong long-term profits is about outperforming your benchmark in both up years AND down years.

If you can return a few percentage points more than the market during up years and decline a few percentage points less than the market during down years, you’ll earn incredible long-term profits.

Lesson Summary: The Biggest Mistakes Investors Make

Every investor makes mistakes. Everyone has to learn at some point.

What matters most is that you remain eager to learn and always improve the way you invest. 

In the meantime, we’d recommend you avoid making these common mistakes:

  1. Only buying companies you know
  2. Buying companies you like
  3. Buying buzzworthy companies
  4. Owning too few stocks
  5. Forgetting to rebalance
  6. Forgetting to reinvest dividends
  7. Buying high, selling low
  8. Performance chasing
  9. Trying to time the market
  10. Fearing the stock market crash “bogeyman”
  11. Having a short-term focus
  12. Having unrealistic expectation
  13. Looking at your investment portfolio too much
  14. Watching too much CNBC
  15. Craving action
  16. Abandoning a good strategy too quickly
  17. Taking on so much risk you’re not sleeping
  18. Getting greedy
  19. Assuming a stock with a low price is undervalued
  20. Assuming a stock that has sold off is now undervalued
  21. Blindly following a “buy and hold” strategy
  22. Holding losers for too long & selling winners too soon
  23. Ignoring relative performance

Todd Lincoln


Passionate stock market investor with deep experience trading small cap, dividend, and growth stocks.

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