Retail investors who buy stocks to fund their retirement portfolio or to generate additional income often find themselves prey to trying to time the market, failing to sell losers and selling stocks too soon.
The persistent all-time highs reached in the markets have also made some retail investors wary of allocating too much money into stocks since many of them are overvalued. Divesting their equity holdings and going to cash has many inherent risks such as sitting out of the market for too long.
Following the wrong herd can also lead to large losses. Here are the top ten worst mistakes that retail investors can conduct.
Eating these new M&M's is not a mistake.
Timing the market accurately remains a large fallacy, yet many traders attempt to do so often. Unconvinced, these traders are believe they have the ability to predict the direction of the stock or the market, said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa.
"When you attempt to time the market, you must make a series of good decisions - when to get into the market, when to get out of the market, and when to get back in the market," he said.
Instead, what happens is that these portfolios underperform the market averages because the investors wound up buying high and selling low, Johnson said. This is the "exact opposite of the old Wall Street axiom of 'buy low and sell high,'" he said.
Selling your stocks that have lost an insurmountable value appears like a practical financial decision to make because of the tax advantage, but too many investors are loath to take action. This phenomenon occurs frequently because people tend to despise accepting losses and others are convinced they made the right decision, even after the stock has suffered a 20% dip.
"Investors convince themselves that until they sell the stock and realize the loss, they haven't really suffered it," said Johnson. "Even the world's most successful investors have their share of investing disappointments. If a stock moves against you, think honestly and critically about whether your case to buy the stock was faulty or whether the market is truly undervaluing the stock and its price will likely rebound."
Buying the stocks of companies that have generated a lot of interest because the entrepreneur seen as a visionary or sells an extremely popular retail product can often lead to disappointing losses. The same is true for many IPOs. Learning and understanding the business that the company is involved in is the first step.
A story stock can be either a company with a new product which is as "sure thing" or one that will grow forever, said Bill DeShurko, president of 401 Advisor, a registered investment advisory in Centerville, Ohio. "Typically, the investor read an article or saw a news story about the company. However, 90% of the time the investor has no idea about its finances such as the P/E ratio, earnings or debt ratios. They just know it will soon 'go up.'"
The underlying issue with this error is that a large gain has already occurred or it's being "being touted to generate some volume so someone much bigger can bail out with some buyers still bidding on the stock," he said.
Too many traders invest in companies where they don't have much knowledge about the industry or their competitors, said Ron McCoy a portfolio manager on Covestor, the online investing company, and founder of Freedom Capital Advisors in Winter Garden, Fla.
"Never buy something that you don't understand, he said. "If you are clueless about how a company functions or makes their money, investors should reconsider looking elsewhere."
Many investors "follow the herd" into the latest IPO without conducting enough due diligence. A business's value can not always be determined until six months to a year after a company has gone public, said Jon Ulin, a managing principal of Ulin & Co. Wealth Management in Boca Raton, Fla.
Since stock prices often shoot up in the first week after an IPO occurs, waiting to buy shares of a newly public company can be a better strategy. One example is SNAP's IPO, which was set at $17 per share and opened at $24 in March 2017.
"If you bought the stock at $26, you would have lost 42% over the past four months now that the stock is near $15 and $11 billion of its market cap was wiped out," he said. "We remind investors to take caution especially when investing in tech stocks more so than industrial companies of the past since they do not depend on physical resources to build a product nor hold inventory that can be easily measured."
Waiting until the stock price settles down and the actual revenue, profits and "realities of the company come to light" can be your best bet, Ulin said.
Purchasing stocks or options that are risky for short-term gains is rarely a good idea, since your entire investment can vanish in one trade.
"Investors want to be more aggressive so they can make more money, which is typical behavior during a bull market, but many forget that doing so also means a higher probability of not meeting objectives or out right losing money," said DeShurko.
The day to day volatility in the market can be extreme and some traders panic quickly and sell their positions too soon, said Patrick Morris, CEO of New York-based HAGIN Investment Management.
"Watching a trade immediately after you make it, getting cold feet and quickly dumping it - if you believe in the story, you have to stick it out," he said. "Rising tides lift all ships but the inverse is also true. Trading into a position on a down day or down week can poison your conviction."
Even if a company is generating a healthy profit or providing a dividend does not mean that its stock does not experience volatility or dips.
"Don't ever think 'it can't go down," said McCoy. "Thinking like that and loading up on a position can be hazardous if you're wrong."
Some stocks lack volume or just are not traded very often and placing market orders on them can be a "big mistake," said McCoy.
"Often there can be a spread and it's always better to try and work your order," he said.
Waiting for your stock to rise again can be a major fallacy because it may not return to its previous high for a long time."An investment decision should be made based on if the current price is too high (sell) or too low (buy), compared to the 'fair value' which is fundamentally determined," said K.C. Ma, a CFA and director of the Roland George investments program at Stetson University in Deland, Fla. "You should have the same decision on a stock regardless of your cost base."
Buying low and selling high is the axiom which all investors strive to obtain. Being successful at finding the next dip can be difficult to achieve.
Not all stocks bounce back and frequently investors fail to analyze the company's position within the industry, said Jason Spatafora, co-founder of Marijuanastocks.com and a Miami-based trader and investor known as @WolfofWeedST on Twitter.
"Investors need to look at charts, catalysts for the company and assess the risks beforehand," he said. "Often this doesn't happen and they end up catching a 'falling knife.'"
JC Penney's past six-month trading history is a "good example because many investors, mostly novice ones, saw its major dips as can't lose trades," Spatafora said.
What these investors failed to factor in was the macro outlook for brick and mortar retail stores versus online shopping which has been "cannibalizing that industry," he said.
Buying the dip on a company which is suffering in a declining vertical is already too risky. If the investor had calculated the amount of risk and the potential for growth, "he/she would have moved on," Spatafora said.
"If you want to buy a dip, only do it on days when markets are overreacting and blue chips get unfairly hit on flash crashes such as Brexit or Trump getting elected," he said.
Borrowing money or buying on the margin often does not bode well, even if the stock appears to be a sure thing. Using money allocated for your retirement or a child's college education is not recommended, said Spatafora.
"Do not invest what you can't afford to lose," he said. "It still boggles my mind that people think the stock market is this magic ATM where you put money in and more money comes out. The market does not care if you used money you set aside for a new house for a can't miss opportunity."
This tactic often results in investors leaving the market altogether. "The quickest way to sour yourself in the market is to invest what you don't have to lose as there is no minimum payment on losses," Spatafora said. "If you aim small, you have smaller losses when you are learning the market and tip the odds in your favor."