5 Common and Deadly Investment Mistakes

Posted by DebtKid :: March 13, 2008 @ 6:04 pm

Have you ever made a real investment mistake, a disastrous one? I know I have. For the sophisticated, mistakes like these can be investment opportunities. For average Joes like you and me...they should be avoided.

When I lost over $250K trading, I was guilty of 3 of these 5 mistakes (can you guess them?). Avoid these missteps and you'll be in good shape over the long haul.

1. “Free stock tips”

“Hot” and/or "free” stock tips are easy pitfalls for the novice investor. While at a cocktail party, a friend of a friend tells you about this "for sure acquisition, happening next week."

It sounds like a sure thing.

Run the other way! Think about it for a minute...how many other people must have heard this particular stock market tip in order for that guy to blab? Hot tips are for great service at a restaurant, not investing.

2. Margin stock trading

Invest for the long term, right? Well, if you're trading stocks on margin, you are throwing that right out the window. Margin trading is for day-traders and swing traders, not the average investor.

If you need a loan (i.e., margin) to buy more stocks, you really need more cash. Combining margin and a "hot tip" is a sure way to double your losses real fast.

3. Options trading

Margin trading typically allows you to double your stock buying power. With options, the risk can be even greater. When used correctly to manage risk, options are fantastic, but for the average Joe investor, it's best to stick with stocks straight up.

Fast Rule: If you don't understand fundamentally how options work, you shouldn't be trading them. Period.

4. Low/high priced stocks

You just bought 100,000 shares.....woo hoo! You're rich, right?

Um, that was a $0.01 stock, dude.

Don't get sucked into thinking that the trading price of a stock (be it 5 cents or $450 a share) has anything to do with its value as an investment. A $1,000 stock is not "expensive," nor is by any means a nickel stock "cheap."

Don't buy into the high stock price = expensive or low stock price = cheap psychology.

5. FOREX trading

FOREX (foreign exchange) or currency trading has been a growing industry over the past few years. The volatility of the US Dollar as well as easy access for individuals to invest has led to tremendous growth in the FOREX world.

FOREX trading is also the fastest way to lose your shirt. Trust me, I know. I had quite a bit of trading experience before getting into FOREX...and it's a whole other world. Forget 2:1 margin ratios; try 200:1 or even 400:1. Sound exciting? It is...until your money is gone.

99.99% of investors should not be trading FOREX. If you want to buy currency, stick to currency-based index shares.

Want a little more safety? Invest wisely.

Does investment risk keep you up at night? Consider putting some of your investments into a peer-to-peer loan portfolio from Lending Club. You'll get an above average return, and you’ll be able to sleep at night.