Being an awesome investor and beating the major indexes is so easy to do, it seems that every other email in my inbox is highlighting strategies on how to do it. So, I thought I'd compile my list of activities that can help you be the opposite – the worst investor ever.
Being a bad investor is not just about losing money. Even bad investors can make money in the stock market here and then. However, bad investors are lucky, and don't have a strategy or purpose behind their moves. That will always get them in trouble in the end.
1. Trade Frequently
You have probably heard of this before, but trading frequently can be extremely detrimental to your returns. If you are trading daily or even weekly, you are probably spending a small fortune on commissions. Beyond the fees, you need to look at you returns as well. Constantly entering and exiting positions is more like gambling than investing, since you are focusing on short term price movements instead of investing in companies for their fundamentals.
2. Don't Do Research
Not doing research on you investments an be a huge downfall. Even doing the basics – I like company XYZ because of what it sells is better than taking the advice of an Internet message board or email. Make sure you understand what you are buying if you want to not fail.
3. Buy Penny Stocks
If you invest in penny stocks you have one story over the long run (not just for a month, but for years) – losses. There is a reason these stocks trade for less than a dollar – their financial position merits it. Yes, every now and then one takes off, but that is the rare 1 in 1000 case. These stocks are extremely volatile,and they have no place in a true investor's portfolio.
However, some people have excelled at investing in penny stocks. Timothy Sykes makes millions trading penny stocks. Unless you're an expert, though, avoid this.
4. Buy Leveraged ETFs
Buying leveraged ETFs is another investment that is for poor investors. These investments are all contract based, and as a result, don't even mimic the underlying index over time. So, if you want skewed results, this is the investment for you.
5. Not Thinking About Taxes
Bad investors don't think about taxes – just look at their investment choices. They trading often, buying volatile companies, and not thinking about how to do it efficiently. Are you invested in tax deferred accounts or a standard brokerage? Bad investors don't even know!
This is not by far a complete list of bad investing behavior, but I think it does cover a lot of the key bad investor issues.
Readers, what are your thoughts? Do you have anything to add, or don't agree with what I said?