I realised these are common pitfall because new investors have similar reactions. Not just that, everyone has the tendency to take similar shortcuts to decision making.
Hence, if you are new to investing, these are some common pitfalls to take note of.
It is possible to learn from the silly mistakes of others and this can save you money.
Silly Mistake #1: Choosing a share or a fund based on dividend yield!
Bad idea! And a very common one! I'd share with you an example.
In Singapore, listed company Asian Pay TV Trust (APTT) cut it's dividend rate massively in 2019.
It was from 6.5c in previous years to ONLY 1.2c in 2019! That's more than an 80% drop!
Needless to say, share prices fell massively soon after.
Many analyst have highlighted it's unsustainably high dividend rate which was above its Free Cash Flow.
What about for funds?
If you see the chart below, I've filtered for you the top dividend paying funds with yields in excess of 8%p.a.
Choosing these funds seem like a good idea to get a strong dividend income.
But if you check, these funds are in the high yield bonds space.
While high yield bonds have their merits, choosing funds or high yield bond funds purely based on dividend yield is a dangerous short cut to take.
As shown in the chart below, the 3y sharp ratio for these featured funds have been generally poor. This means you take on excessive volatility in your total return.
#Sharp ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Silly Mistake #2: Insufficient time in the market
Firstly, every time you buy and sell, it's at possibly a 0.5% loss just to brokerage costs.
The next idea always seems like better than what you have. Very common!
Excessive trading will incur you higher trading costs which is a silly mistake to avoid! Don't fall in love with a new investment idea.
That is a reason why many make their money in property rather than shares trading.
Even though there is stamp duty of close to 3% each time.
Property investments or ownership tend to be 10years, 20years or even longer.
So what is sufficient time in the market?
When it comes to investing, my suggestion is to have an investment timeframe of at least 10years. Equities are trending up especially when you look from a multi decade timeframe,
The cliche quote below from the late Sir John Templeton sums it up.
Silly Mistake #3: Buy High And Sell Low
Especially potent a mistake if you jump on the "hottest investment" bandwagon!
Quick story: I remember a close buddy of mine talking about bitcoin!!
He's NOT the investment kind of guy and EVEN he was punting some into bitcoin.
That shows that the "herding mentality" and greed can affect investment judgement.
But ALL "hottest investment" idea that promises big gains will falter at some point. Nothing goes to infinity.
If you understand this, you can avoid the typical buy high and sell low problem.
Question what the crowd is buying rather than following them!
Silly Mistake #4: Buy Low And Sell lower - catching a falling knife
I made this silly mistake especially after being an investor for awhile.
The buy high and sell low is obvious. But this silly mistake catches a not so newbie investor more.
Why does it happen?
You may have heard of "BE GREEDY WHEN OTHERS ARE FEARFUL". This is part of a Warren Buffett quote and in my opinion frequently misinterpreted.
A share price drop does NOT signal a time to go "ALL-IN" and get greedy.
I'd share an example with you which is STARHUB whose share price has tumbled. At some point, it felt cheap enough for me at $2. Silly mistake now it seems.
Such a story of a reputable company whose share prices have dropped frequently attract new investors who bet that the worst is over.
In most cases, the expectation of a quick rebound is wrong and the share is quickly sold (at a loss) away a few months later.
The concept of "Price Stop Losses" are to be blamed. The lack of initial due diligence is to be blamed etc..
Silly Mistake #5: Listening TOO much to dooms day gurus
This is from famed investor Jim Rogers who was the co-founder of the Quantum Fund and Soros Fund Management. Extremely qualified as an investor.
Hearing such a warning would have gotten you ALL CONCERNED AND WORRIED!!
Until you see this portion of what he has mentioned yearly....
2011: 100% Chance of Crisis, Worse Than 2008: Jim Rogers
2012: Jim Rogers: It’s Going To Get Really “Bad After The Next Election”
2013: Jim Rogers Warns: “You Better Run for the Hills!”
2014: JIM ROGERS – Sell Everything & Run For Your Lives
2015: Jim Rogers: “We’re Overdue” for a Stock Market Crash
2016: $68 TRILLION “BIBLICAL CRASH” Dead Ahead? Jim Rogers Issues a DIRE WARNING
2017: THE BOTTOM LINE: Legendary investor Jim Rogers expects the worst crash in our lifetime
The issue is the media tends to sensationalise stories and take points out of context.
No one has a crystal ball of the future. Hence, "expert opinions" from gurus and economist should remain as news and NOT the foundation of your investment strategy.
TOO many have sold out of markets because of this or TOO afraid to invest because of this.
It is a very problematic silly mistake.
I've more to share in the next post, which is on an action plan to invest well! So do stay tuned.
Conclusion
Avoiding these common pitfalls in investing will save you a lot of heartache.
If you are keen to start your investment journey, talk to someone experienced or a qualified financial advisor. I can be reached at josh.tan@promiseland.com.sg if you have further investment questions.
I've this further post and if you are keen to learn further click below...
How To Start Investing - Financial Advisors Give Their Best Advice
Last updated on December 30th, 2019 at 02:41 pm