We all make investment mistakes, dont we? I know I still do, even after 25 years. Investing for the long term, diversifying and minimising our trading to keep costs low will help avoid the most painful pitfalls, but here are a few of my favourite things to avoid:
Dont spend your dividends
Its easy to set share price growth as our target and see dividends as a bonus bit of cash to spend as it comes in. But we can see what a mistake that would be if we examine the 10-year performances of some FTSE 100 stocks.
A 10,000 investment in Diageo (LSE: DGE) a decade ago for example, would leave you with around 25,000 today but reinvesting all those tasty dividends would have boosted that to 35,000!
Steer clear of cash tomorrow stocks
It can be very tempting when you see a company telling us of apparent profits and boasting great growth forecasts but you need to check whether those accounting figures actually represent real hard cash.
Insurance outsourcer Quindell (LSE: QPP) has been reporting impressive profits, but much of it was deferred and accruals some profits have been booked based on estimates long before theyll even be invoiced.
Quindell shares have crashed by 90% since their peak after investors were scared off by poor cash flow.
Dont just follow the crowds
When you see the latest big thing that everyone is talking about, its tempting, isnt it? But when everyone else is buying, thats probably about the worst time you could get in the madness of crowds often sends prices rocketing before the inevitable crash.
Punters have pushed online fashion retailer ASOS (LSE: ASC) to sky-high valuations twice now, and twice its crashed again and if you ask me, its still over-valued.
Dont buy something you dont understand
If you dont understand how a business works, then dont be a part owner of it.
The Oil business is one, and very few people know how to value a small explorer that isnt making any profit yet. If youd jumped on the Falklands bandwagon a few years ago and bought one of the handful of companies drilling in the area, youd be forgiven for crying now.
Falklands Oil & Gas (LSE: FOGL), for example, has seen its share price collapse by 85% over the past five years, and hasnt paid a penny in dividends.
Dont listen to Warren Buffett
Well, he did buy heavily into Tesco (LSE: TSCO) just before the collapse, didnt he? OK, no, Im not actually suggesting you dont listen to the experts just dont follow them blindly.
Do listen to what successful investors say and learn from how they work, but dont forget to do your own research and make your own decisions for yourself based on your own investing preferences its your money, and only you are responsible for it.
Above all, if you follow a very simple approach to investing, you should be well on the way to financial security.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of ASOS and Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
