Often, obvious mistakes are the ones most repeated in life. Investing doesn’t escape this paradox. People have short memories and history usually repeats itself in the financial world. Investing can be complicated if you have no experience with the basics of personal finance; however, you must start learning about investing now in order to plan for a brighter future. Avoiding the following top 10 investing mistakes will help everyone from the new investor who is just learning to an experienced investor who needs a refresher.

• Limit orders

One of the first mistakes one makes when investing is using limit orders instead of market orders. Limit orders set the exact price you pay for a stock or exchange-traded fund, while market orders are filled at the current price when you enter the trade. Long-term investors should only place market orders. If you are investing for 10 to 15 years or more you shouldn’t be worried about a few ticks within a matter of minutes.

• Margin

Using margin can be hazardous to your financial health. Margin is actually the amount of money your brokerage firm loans you to buy more securities — think of it like a credit card. You often get up to 50% of your portfolio’s value to borrow. The downside is paying interest and having a margin call if your balance falls below a certain point. Instead of using margin, save up the money before you invest.

• Magic product

If you have ever been up late watching television into the wee hours of the morning, then you have undoubtedly seen infomercials. They tout secrets of buying real estate with no money down and promise huge profits through options and futures. A recent television commercial actually interviewed a family and showed their kids getting in on the trading. However, the fact is that exotic investments like options and futures are highly complex and can be risky if you are a novice investor. The commercials might make this magic product seem like the best way to make fast money, but it’s a commercial and that’s precisely what it’s meant to do.

• Timing the market

Study after study has shown evidence that timing the market doesn’t work. However, every year thousands of people try to time the market only to end up disappointed. Timing the market involves making frequent trades in order to get in when the market goes up and get out when it goes down. The problem with this strategy is it’s almost impossible to predict the future. Instead of trying to beat the market, set up a sensible portfolio asset allocation and stick to it. Use dollar cost averaging by adding money to your positions when you can.

• Stock selection

Those who try timing the market and fail often venture over to stock selection. This involves choosing certain stocks you think will outperform a certain index. The trouble is that even professional money managers can’t do this consistently. You could throw darts at a board, but investing in the S&P 500 is a wiser choice. The S&P 500, known as the Standard and Poor’s 500, is an index of the largest 500 stocks in America. It is the most commonly quoted barometer of the U.S. economy and you can buy the index in an exchange-traded fund under symbol SPY or IVV.

• Not diversifying

The most important rule of investing is to be diversified. In other words: Don’t put all of your eggs in one basket. This rule seems simple enough, but it is easy to forget. At first, you might start out diversified, but then one position gets inflated and you might not rebalance. Don’t get caught up in the whirlwind of that new biotech stock either. With risk comes reward, but taking on too much risk with one company is just foolish.

This entry was posted on Thursday, December 6th, 2007 at 5:30 am and is filed under Stocks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.