3 ways you are hurting your own investment returns

When it comes to investing, no one wants to lose money.

Investing is a process of understanding what the risks are and weighing whether the potential returns are worth it. Sometimes, investors overthink this process and end up losing more than they can stomach.

Here are three things to be mindful of when it comes to investing in stocks:

1. Do not try to time the market.

The stock market moves up and down every day, and its price movements are quite irrational. A company can have great fundamentals and be a good company to buy into, but other investors may panic sell on this stock, just because they heard some bad news over the grapevine. That is why it is difficult to always time the market perfectly.

Investors may hold onto a stock for too long thinking it can go up or hold onto a losing stock hoping that eventually, the price will rebound. In these situations, set a price limit on how low the stock will go before it is sold (to cover your downside) and set a price on how high the stock can reach (to cover your upside). Setting a price limit order will take the guesswork out of timing the trades.

2. Do not make too many trades, causing transaction fees to add up.

Some investors like to speculate on companies and would attempt to trade often on a particular stock by buying and selling the stock daily or weekly. These investors gamble by trying to earn the spread between the stock’s daily high against the stock’s daily low.

Although this strategy can work sometimes, it is also a bit risky because every time a trade order is executed, the investor has to pay transaction (commission fees) on it. Over time, these transaction fees add up.

When it comes to investing, try not to buy or sell a particular stock too much. Once committed to a buy or sell strategy, execute on it and hold.

Invest in different companies from different industries. (Photo by OTA Photos via Flickr. CC BY-SA 2.0)

3. Diversify your portfolio.

Don’t pull all the eggs in one basket is a tried and true slogan to follow. Every stock has its own risk profile, and the stock will move up and down according to the industry and the type of business it operates in. This is why it is important to add companies from different industries to an investment portfolio.

For example, if an investor has substantial holdings in technology stocks, then it makes sense to add a stock that is completely unrelated to technology companies, such as companies in real estate or the energy industry.

If there is ever a technology crash (remember the dot-com bust of the late 1990s?), the technology stocks will plummet, but the stocks invested in real estate or energy will likely be safe. This is the point to diversification.

Investing is not rocket science. It all comes back to understanding the stocks that you invest in.

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DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

(Featured image by OTA Photos via Flickr. CC BY-SA 2.0)