8 Stock Market Investing Mistakes to Avoid on Your Journey to Financial Independence

I’m a big fan of growing wealth in the stock market. Amon and I were able to reach financial independence and retire early because of our investments in the stock market. It’s a great way to accumulate wealth, especially when working towards a FIRE goal. That said, there is definitely risk involved, and room for mistakes to be made.

Amon and I first began learning about how to invest in the stock market after we graduated from college. It seems like it’s been ages! But, throughout those “ages,” Amon and I have become better investors. More specifically, we’ve become better at identifying and avoiding some of the common investing pitfalls and mistakes we see others make.

With that in mind, I want to share some of the common mistakes with you . . . so that you can also identify them and learn to avoid them. So, here goes: 8 common stock market mistakes to avoid!

1. Only Investing In Recognizable, Brand Name Companies

Let me start by saying that you should 100% be investing in stocks that you know. But the caveat here is that what you “know” should be more than just a basic familiarity with the brand. Your knowledge of these stocks must be more than superficial if you want to ensure you're actually making a good investment. Most new investors are already very familiar with big companies, so when they open up their investment accounts they immediately gravitate towards what they know and buy these companies without doing their own research. DON’T DO THIS! You’ve got to do the research to determine whether or not the stocks you’ve heard about are a good fit for your portfolio and are more than just hype.

Studies have shown that the top stocks owned by millennials are: Apple, Amazon, Facebook, Tesla, and Netflix, and this makes sense given that these are the stocks that millennials, and dare I say most of us, most recognize immediately. After all, in today’s digital age almost everyone uses Amazon to shop, owns an iphone, has a facebook account, etc. so these brands are top of mind. But the problem with only investing in these brand name companies is that people often don’t do their due diligence. They’re not listening in on quarterly calls, looking at annual income statements, or doing any of the research that people should be doing when investing in individual stocks. This can ultimately lead to buying stocks they may otherwise have passed on.

Something else to consider is that there are SO MANY stocks out there, most of which you’ve likely never heard of and many of which are good investment opportunities. You may be doing yourself a serious disservice by ignoring these and limiting yourself to name brand stocks.

The bottom line is, before buying individual stocks (should you even decide to invest in individual stocks!) you need to do the RESEARCH in order to make the best financial decision for you.

2. Trading Too Often

Studies show that the longer you hold stocks, the more successful you’ll be. This makes sense considering the costs associated with trading frequently (more fees, higher taxes, etc.) and the fact that you are more susceptible to emotional trades, meaning you trade based on feelings and emotions rather than fact-based rational reasons like changes in a company's financials. Often, when people trade emotionally, they don’t realize the benefits of holding an investment for years - the return is just much greater in the long run. By limiting the amount of trades you make in favor of a long-term buy-and-hold strategy, you are almost guaranteed to get better results.

3. Getting Caught Up In The Stock Market Frenzy

When there are fluctuations in the stock market- particularly when there are significant drops- people tend to freak out! This is perfectly natural. But the thing is, if you allow these feelings to dictate how you trade or invest, you’ll find yourself falling victim to emotional trading and meet the same problems discussed above.

Stock market fluctuations are NORMAL and EXPECTED, so don’t panic. A smart investor will view these price drops not as a reason to sell, but as an opportunity to BUY. Investments see the best returns when they are LONG TERM! So when price drops happen (and they will happen) think of them like sales - during which you can pick up your investments at a discounted price!

One more thing to consider: the reality is that every time someone cries about an impending stock market crash, and every time that there has been an actual crash, no matter what happens - the market has always recovered. Not only has it recovered, but it has historically always come back stronger!

So for most folks, in most cases, as long as you have a long term outlook (and you don’t panic sell), temporary dips in the market really won’t negatively affect you. If you give it time, you can pretty confidently expect your portfolio to come back stronger than ever! Remember, whenever there has been a low, there has always been a higher high!

4. Lack Of Diversity

A lot of people get started with stock market investing because they love one particular company, and end up pouring a ton of money into just that one company. This is NOT a recommended strategy! In fact, it's incredibly dangerous because in doing this, you’re essentially putting all your eggs in one basket. This puts you in a VERY risky situation because whatever the whims of that company, so goes your investment.

To be clear, I’m not saying individual stocks are horrible - Amon and I have invested in a number of them ourselves (though they are a small minority of our overall portfolio). What I am saying is that choosing an investment strategy that allows for more diversification, such as investing in ETFs or index funds, is likely safer and will likely yield better returns.

That said, if you do feel the urge to pick and choose your own stocks, don’t invest everything into a single company. Instead, consider building a diversified portfolio of at least ten different companies! This will keep you better protected if one or more of your chosen companies end up performing worse than you anticipated.

5. Investing Without A Plan

Never start investing without a plan! While your plan doesn’t have to be complex (you can have a plan that fits onto a single piece of paper!) it does need to be personalized in order to be the most effective for you. This is why your plan should consider not only what companies you want to invest in, but also more personal details like when you want to retire, how you plan to access other investment accounts, whether you plan to invest if have debt, etc.

If you don’t have a plan, building a successful portfolio will be that much harder because you won’t know how long you should be holding your investments, when you should be rebalancing, how you should be allocating space in your portfolio, etc. So before you do anything else, make sure you do your due diligence and get that plan ready!

6. Relying Too Much On “Experts”

If you rely on experts or professionals, you should understand that sometimes their goals can differ from yours. For example, they might be more focused on achieving certain quotas, bonuses, commissions, trading fees, etc. than on helping you achieve the best returns possible. Because these “experts” may not have your best interests at heart, relying too heavily on others is risky and you can end up burned. This is YOUR MONEY and YOU should determine how your money is allocated. And this is why financial literacy is so important! In order to determine how best to allocate your money, you need to know what you’re doing. So take some time to focus on financial literacy!

7. Trying To Time The Market

Timing the market refers to the strategic planning of when to enter or exit the stock market for the best profitable outcome. We see this happening all the time, like when people refuse to invest because they either think the market is too high (so they wait until it falls lower to invest) or they think the market is falling and will continue to fall (so they wait, hoping to buy in at an even lower price point).

But the problem with this is that no one can successfully and consistently time the market - you just never know what will happen! This is why timing the market never works as a long term investment strategy. You’re much better off if you just invest consistently, regardless of how the market is currently doing. It is not about “timing” the market, it is “time IN” the market. Truer words have never been spoken- the longer you are in the market, the more successful you can ultimately be

8. Paying High Fees

Paying fees is generally a necessary cost of investing. Trying to avoid paying any fees at all is probably a futile endeavor. That said, there are things you can do to keep your fees as low as possible. Keeping your investment portfolio simple by investing in low-cost index funds (for example) will help keep your costs significantly lower. Having said that, despite the options available right now, there are still people spending 1% to 5% for “expert” advisors to manage their money. The thing is, these advisors are doing little more than investing your money into ETFs or index funds - basically, investments that you can make on your own. Bottom line: Always be aware of fees!

And there you have it - eight common mistakes we see people making when they invest in the stock market. The good thing is, these mistakes are completely avoidable! Hopefully this post will help you guys to be aware of these pitfalls and catch yourself if you find that you’re starting to make these mistakes!

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