Avoid Common Errors

One requirement for successful investing is keeping mistakes to a minimum. What are the most common ways investors go wrong?Kiplinger's Personal Financemagazine has examined this question over the years and counts eight mistakes that recur with unnecessary frequency. Forewarned is forearmed.

1. Not having an investment plan.

Without a long-range objective, you fail to decide in advance what type of company you want to own stocks in -- long-term-growth companies, cyclical firms or speculative ones.

You don't decide whether you want current income or capital gains. You shoot from the hip. Or you abandon your plan when the market is bursting with optimism or sulking with pessimism. (See Establish Your Game Plan.)

2. Not taking the time to be informed.

Failing to get information about a company before investing in it is the most common form of this mistake. Some investors buy stock in a company without knowing what the company makes and what the future might be for that kind of product.

3. Not checking on the quality of your advice.

Many investors don't check on brokers or advisers before doing business. They don't investigate their educational or professional background. They don't ask to see sample accounts. (See Recruit the Right Broker.)

4. Investing money that should be set aside for another use.

People tie up money that should be available for emergencies or for the purchase of a new car or another predictable expense. If you invest what should be emergency funds in stocks, you may be forced to sell at a loss.

5. Being optimistic at the top and pessimistic at the bottom.

Optimism and bullishness are infectious, as are pessimism and bearishness. Thus, even when the market is high by such standards as the ratio of prices to earnings, people go right on buying.