The Internet has made the whole process of investing a lot simpler but it has not necessarily made it easier for investors to make money.
Contrary to what a lot of investors may think the same rules of investing still apply in spite of it being cheaper and easier to buy and sell securities.
All things considered investing online has probably brought you as many negatives as what it has made investing easier.
I have put together the main mistakes made by online investors I have discovered through experience, assisting subscribers and working with other investors
I am sure it will help your investment returns.
Here is my list…
Trading too much
The biggest advantage of online brokers is the ease with which you can buy and sell securities.
Everything from stock, bonds, preference shares, you name it, can be bought and sold at the click of a mouse.
This has made it so easy to buy and sell securities that it has become a negative rather than a positive.
I am not a big believer in trading (short term buying and selling). Believe me if I could make money trading I would, I have tried it ( a few times) and it didn't work.
My answer to any investor is that the recipe for investment success is to find undervalued investments analyse them, and invest.
Returns from undervalued investments are made while you sit tight waiting for the undervaluation to be discovered and the investment revalued.
If you buy and sell too often the only person that is going to make money is going to be your broker irrespective of how cheaply she executes your trades.
Checking your portfolio all the time
The Internet makes it so easy to keep track of the minute by minute movements of your portfolio and a lot of investors do it without thinking.
It is tempting to know what your investments are doing all the time but it is unlikely to improve your investment returns.
In fact studies have shown that the returns of investors actually go down the more often they look at their portfolios.
This is mainly because the daily movement of your portfolio is mainly noise as it cannot be linked to any specific information.
Market commentators always seemed to have a ready answer as to why the markets are higher or lower, and their answers are convincing.
The only problem is they are as clueless as we are as to the cause of the movements. The difference is that they sound convincing and give a reason that seems plausible.
So how often should you check your portfolio?
This is what I do.
I check my portfolio on a daily basis.
In the morning before the market opens to record the portfolio value (I have resorted to tracking my portfolio performance in the same way as a unit trust or mutual fund does as I have found this the most accurate) and once or twice during the day to see if there has been any major movements where I need to look for company specific news.
A few times a day I check the movements of companies on my watch-list (companies I want to buy). Mainly to also look for company specific news but also to identify possible buying opportunities because of sudden price drops.
For the rest I avoid any general market information and financial television as this leaves me more time to research new investments.
Selling your winners and holding your losers
This mistake is probably as old as investing itself, but in spite of the advantages offered by online investing it hasn't gone away.
If you invest online you have great tools available to limit losses through automatic stop loss orders, but I am sure you have not thought of using the ability.
Automatic stop losses are controversial but as I explained in the article Do You Know the First Rule of Investing? I am a supporter of following a strict stop loss system of risk control.
Letting your winners run and getting rid of your losers is a great strategy for long-term investment success.
Experience has taught me that most of my really good investment ideas paid off right from the start. And my past returns would have been a lot higher had I implemented a strict stop loss system earlier.
The get rich quick idea
Getting rich quick through the stock market is not a new myth. However, online investing, the internet bubble, or both seems to have given it new life in the form of day trading.
As I have said above I would have loved to be able to trade my way to riches but I've just not been able to do it.
Sure I have had some short-term profits but it has been the exception rather than the rule.
Successful investing is the implementation of a proven investment process over a long period of time which, because of its proven track record, gives you a high probability of success.
Success at short-term trading has no track record that I could find, and thus no reasonable chance of being successful.
You can read more about an investment process in my article The Best Investors Have This... Do You?
Following the media all the time
The whole idea behind financial media is to get you to start watching and to keep you watching. They make money through advertisements and the more people they have watching, the more they earn.
It is thus highly unlikely that anybody in the financial media has got any interest in increasing your investment returns.
As I said, the financial media has an explanation for every market movement which is unlikely to be correct. And even if it was it would be too late for you to be able to profit from it.
They love talking about what I call yo-yo news, what has gone up or down. Also company’s hitting new highs or that are subject to exciting developments, are most likely to feature.
My experience and numerous investment studies have shown that the best way to increase your investment returns is to do the exact opposite of what everyone else is doing. And you are unlikely to hear about it from the financial media.
Investing against the crowd in unknown, ignored or hated companies that are undervalued, the ones I recommend to my subscribers, is a far better way to invest and make money.
Keeping your emotions under control
This point has a lot to do with the point trading too much but it is so important I wanted to mention it separately.
Online investing, because of the instant feedback we get in terms of gains or losses, puts a lot of stress on risk-averse and emotional investors.
If you are likely to calculate the amount of money you've lost with the movements of any of your investments you have most likely taken on too much risk or you have invested money you cannot afford to lose.
The one thing about investing that I can say with 100% certainty is that there will always be some investments you will lose money on.
If you have problems sleeping or if you feel uncomfortable with any loss on your investments, you should either reduce the size of your investments or you should invest in less volatile companies or through funds.
Accepting responsibility for your decisions
This may also seem rather obvious but can cause you lot of problems.
When investing online you and only you decide. You gave the order to buy or sell after you have done the research.
It is thus of little or probably negative use blaming any losses on somebody else.
As soon as you do that you take away your decision-making power and the decisiveness you need to limits losses or take profits.
Not doing enough research
All the information available on the Internet has led us to literally drown in it. You can most likely find an opinion on any investment in the internet, buy or sell.
The risk lies in the possibility that investors see the reading of a few such articles as the only research they need to do.
Over time I have put together a structured research process where I work through a checklist to ensure that I do not miss anything important.
For more information see the article What Does Your Investment Check-List Look Like?
Relying on someone else’s research is unlikely to be as thorough as your own investment process.
It is also important to avoid the temptation to first look for research on the internet, and then with this possibly wrong or biased information in mind, try to form your own opinion.
These are the important mistakes made by online investors I have come up with.
That said, I would be the last one to give up the benefits of online investing: real-time prices, increased volume of shares traded, and the ease of entering orders, stop losses and of keeping a watch list.
I am, however, sure there are some points I have missed. Should you have a good to add one please do add it in the comments below.
__________________________________
Bio
Tim du Toit is editor and founder of Eurosharelab. On his website he reveals what more than 20 years of equity investment have taught him – sometimes at considerable cost. To discover how you can avoid costly mistakes and enjoy greater profits, sign up for his free newsletter “Investing That Makes Sense” at www.eurosharelab.com.
Contrary to what a lot of investors may think the same rules of investing still apply in spite of it being cheaper and easier to buy and sell securities.
All things considered investing online has probably brought you as many negatives as what it has made investing easier.
I have put together the main mistakes made by online investors I have discovered through experience, assisting subscribers and working with other investors
I am sure it will help your investment returns.
Here is my list…
Trading too much
The biggest advantage of online brokers is the ease with which you can buy and sell securities.
Everything from stock, bonds, preference shares, you name it, can be bought and sold at the click of a mouse.
This has made it so easy to buy and sell securities that it has become a negative rather than a positive.
I am not a big believer in trading (short term buying and selling). Believe me if I could make money trading I would, I have tried it ( a few times) and it didn't work.
My answer to any investor is that the recipe for investment success is to find undervalued investments analyse them, and invest.
Returns from undervalued investments are made while you sit tight waiting for the undervaluation to be discovered and the investment revalued.
If you buy and sell too often the only person that is going to make money is going to be your broker irrespective of how cheaply she executes your trades.
Checking your portfolio all the time
The Internet makes it so easy to keep track of the minute by minute movements of your portfolio and a lot of investors do it without thinking.
It is tempting to know what your investments are doing all the time but it is unlikely to improve your investment returns.
In fact studies have shown that the returns of investors actually go down the more often they look at their portfolios.
This is mainly because the daily movement of your portfolio is mainly noise as it cannot be linked to any specific information.
Market commentators always seemed to have a ready answer as to why the markets are higher or lower, and their answers are convincing.
The only problem is they are as clueless as we are as to the cause of the movements. The difference is that they sound convincing and give a reason that seems plausible.
So how often should you check your portfolio?
This is what I do.
I check my portfolio on a daily basis.
In the morning before the market opens to record the portfolio value (I have resorted to tracking my portfolio performance in the same way as a unit trust or mutual fund does as I have found this the most accurate) and once or twice during the day to see if there has been any major movements where I need to look for company specific news.
A few times a day I check the movements of companies on my watch-list (companies I want to buy). Mainly to also look for company specific news but also to identify possible buying opportunities because of sudden price drops.
For the rest I avoid any general market information and financial television as this leaves me more time to research new investments.
Selling your winners and holding your losers
This mistake is probably as old as investing itself, but in spite of the advantages offered by online investing it hasn't gone away.
If you invest online you have great tools available to limit losses through automatic stop loss orders, but I am sure you have not thought of using the ability.
Automatic stop losses are controversial but as I explained in the article Do You Know the First Rule of Investing? I am a supporter of following a strict stop loss system of risk control.
Letting your winners run and getting rid of your losers is a great strategy for long-term investment success.
Experience has taught me that most of my really good investment ideas paid off right from the start. And my past returns would have been a lot higher had I implemented a strict stop loss system earlier.
The get rich quick idea
Getting rich quick through the stock market is not a new myth. However, online investing, the internet bubble, or both seems to have given it new life in the form of day trading.
As I have said above I would have loved to be able to trade my way to riches but I've just not been able to do it.
Sure I have had some short-term profits but it has been the exception rather than the rule.
Successful investing is the implementation of a proven investment process over a long period of time which, because of its proven track record, gives you a high probability of success.
Success at short-term trading has no track record that I could find, and thus no reasonable chance of being successful.
You can read more about an investment process in my article The Best Investors Have This... Do You?
Following the media all the time
The whole idea behind financial media is to get you to start watching and to keep you watching. They make money through advertisements and the more people they have watching, the more they earn.
It is thus highly unlikely that anybody in the financial media has got any interest in increasing your investment returns.
As I said, the financial media has an explanation for every market movement which is unlikely to be correct. And even if it was it would be too late for you to be able to profit from it.
They love talking about what I call yo-yo news, what has gone up or down. Also company’s hitting new highs or that are subject to exciting developments, are most likely to feature.
My experience and numerous investment studies have shown that the best way to increase your investment returns is to do the exact opposite of what everyone else is doing. And you are unlikely to hear about it from the financial media.
Investing against the crowd in unknown, ignored or hated companies that are undervalued, the ones I recommend to my subscribers, is a far better way to invest and make money.
Keeping your emotions under control
This point has a lot to do with the point trading too much but it is so important I wanted to mention it separately.
Online investing, because of the instant feedback we get in terms of gains or losses, puts a lot of stress on risk-averse and emotional investors.
If you are likely to calculate the amount of money you've lost with the movements of any of your investments you have most likely taken on too much risk or you have invested money you cannot afford to lose.
The one thing about investing that I can say with 100% certainty is that there will always be some investments you will lose money on.
If you have problems sleeping or if you feel uncomfortable with any loss on your investments, you should either reduce the size of your investments or you should invest in less volatile companies or through funds.
Accepting responsibility for your decisions
This may also seem rather obvious but can cause you lot of problems.
When investing online you and only you decide. You gave the order to buy or sell after you have done the research.
It is thus of little or probably negative use blaming any losses on somebody else.
As soon as you do that you take away your decision-making power and the decisiveness you need to limits losses or take profits.
Not doing enough research
All the information available on the Internet has led us to literally drown in it. You can most likely find an opinion on any investment in the internet, buy or sell.
The risk lies in the possibility that investors see the reading of a few such articles as the only research they need to do.
Over time I have put together a structured research process where I work through a checklist to ensure that I do not miss anything important.
For more information see the article What Does Your Investment Check-List Look Like?
Relying on someone else’s research is unlikely to be as thorough as your own investment process.
It is also important to avoid the temptation to first look for research on the internet, and then with this possibly wrong or biased information in mind, try to form your own opinion.
These are the important mistakes made by online investors I have come up with.
That said, I would be the last one to give up the benefits of online investing: real-time prices, increased volume of shares traded, and the ease of entering orders, stop losses and of keeping a watch list.
I am, however, sure there are some points I have missed. Should you have a good to add one please do add it in the comments below.
__________________________________
Bio
Tim du Toit is editor and founder of Eurosharelab. On his website he reveals what more than 20 years of equity investment have taught him – sometimes at considerable cost. To discover how you can avoid costly mistakes and enjoy greater profits, sign up for his free newsletter “Investing That Makes Sense” at www.eurosharelab.com.
