There are many do’s and don’ts with investing. Most are pretty straight forward. But some can quickly get you into trouble. Here are five bad investing habits all worth avoiding and a few that can quickly lose your money.
Buying on Margin
Margin trading is a great way to boost profits, it’s also the only way to lose more than 100% of your investment. Buying on margin is using credit to buy securities with the hopes of increasing your profits. The downside is the potential to lose everything and still owe your broker for interest and other fees.
When it comes time to pay, it’s not like a credit card where you send in a minimum payment. With a margin account, if you’re too far in the red, the broker doesn’t need your approval to sell your securities to cover the difference. Your just out of luck and money, wishing you never opened a margin account.
Nobody likes paying taxes. As a whole you should try to pay as little in taxes as possible. There are a couple of ways of looking at this. The first being the old money in a mattress view. That you’re purposely avoiding any investment or savings account that pays an interest or dividend so you don’t have higher taxes. If that’s the case you should get your head examined.
The other side is purposely not selling a security for a profit to avoid paying taxes. This is more a problem of a glass half empty view on things. Look on the bright side, you made money, put a portion aside to cover taxes, and reinvest the rest. You risk too many things by avoiding the sale. Losing any profit you had, and tax code changes to name a few.
Market orders may not seem that bad. Imagine if the grocery store was set up like the stock market. Would you use a market order with food prices changing by the second? Would you buy your food at the next available price or would want to set some limits?
That’s why limit orders are the best. You specify the exact price you’re willing to pay and the limit order protects you from big price swings. If your price isn’t hit you can reevaluate your price point or the investment’s value. The bottom line, investing requires discipline and limit orders push that objective.
Call it chasing returns, looking for a sure thing, or just greed, if you want to gamble with your money go to Vegas. You’re sure to have a great time doing it, may even have your room comped, but the odds are against you as far as making money.
Investments should be made after thorough research. If you somehow need excitement to keep you interested, that’s okay. Use a small portion of your portfolio, no more than five or ten percent, as a trading account. Research a few speculative positions and pick a few you think will pay off. If it doesn’t pan out the losses are just a small part of your portfolio. Of course, the better option is let your investments stay investments and keep the gambling at the casinos.
Impatience is costly. Your portfolio isn’t growing fast enough so you make changes. That stock you bought isn’t rising in value so you sell it. You start second guessing yourself and you move your money into something else.
How costly is impatience? Go back and look over your transactions in the past couple years. How often you make changes to your portfolio? How often did you buy something only to turn around and sell it a few weeks later? Where is the price now, if you had held onto it? Most importantly, how much did you pay for every transaction? Those trade commissions add up and eat away at your profits.
We’re too used to the immediacy of things and it tends to cross over into investing. That’s why it’s good to take a step back, watch from a distance, and see how things play out. When it comes to your investments, bad habits can be harmful to your money. Catching them early will go a long way toward reaching your financial goals.