investing errors http://www.wisebread.com/taxonomy/term/13003/all en-US How Investing Drives Us Crazy: Lessons From a Trade http://www.wisebread.com/how-investing-drives-us-crazy-lessons-from-a-trade <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-investing-drives-us-crazy-lessons-from-a-trade" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/facepalm_guy.jpg" alt="Guy with his face in his hand" title="Guy with his face in his hand" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>Investing can be incredibly frustrating, even when you're doing things &quot;by the book.&quot; I'm going to walk you through a recent trade I made using real money, pointing out all the things I did well. Unfortunately, even though I did everything &quot;right,&quot; I still lost money on this trade. Let's take a look at what happened. (See also: <a href="http://www.wisebread.com/7-common-investing-mistakes">7 Common Investing Mistakes</a>)</p> <h3>Starting Out: It's All About the Sentiment</h3> <p>I was convinced the shares of a certain tech company were headed lower. And since I love tech, I had read up on them and knew what was going on. I felt I could make a very strong case to put my money where my mouth was.</p> <p>So I bought what&rsquo;s called a bear-put spread. I bought five September puts and sold five September puts at a lower strike. It cost me $275, and it would make me $225 if the stock stayed under $30. At the time, the stock was around $31.</p> <h3>Monitoring Your Trade: Pay Attention</h3> <p>Right after I made the trade, things started to happen in my favor.&nbsp;By August 8, it was all the way down to $25 &mdash; good job, Carlos!</p> <p>Then it climbed up past $35...and I got a little anxious.</p> <p>And then came the curve ball &mdash; a huge tech company bought another big one, and rumors started circulating that the stock I was trading might get bought up as well, which I definitely didn&rsquo;t see coming.</p> <p>If you have money on a company, pay attention to every piece of news, even if it isn't directly about that company. Read <em>everything</em>.</p> <h3>If Things Change, Make a Move</h3> <p>This current situation was no longer the situation that existed when I put the trade on. Because of the rumor, my original sentiment no longer applied. At that point, I had two options: stick my head in the sand and do nothing, or get out of the trade.</p> <p>So I sold out of my trade for a total loss of $70, including commissions. I felt bad losing money, but I was also proud of myself for being proactive and doing &ldquo;the right thing.&rdquo; I felt like I was practicing sound <a href="http://www.wisebread.com/how-to-get-a-life-consider-the-worst-case-scenario">risk management</a>, which made me feel like some investing hot-shot who knew what he was doing.</p> <p>If the landscape changes, get out while you can. Don't let greed keep you hanging on to a trade that's gotten out of hand.</p> <h3>The Aftermath</h3> <p>I was feeling great about my &quot;risk management&quot; skills right up until expiration came around.&nbsp;With the stock at $34 the day before my trade was going to end, I almost stopped paying attention.</p> <p>But earnings the day before had been a catastrophe and the stock plummeted all the way down to...$28. I would&rsquo;ve made a profit of $225 if I would&rsquo;ve held on to the trade. Instead, I was down $70.</p> <p>Here&rsquo;s a P&amp;L Chart courtesy of <a href="http://optionshouse.com/" target="_blank">OptionsHouse</a> that shows what my trade did from one day to the next:</p> <p><img height="217" border="1" width="524" src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u781/optionshouse%20chart.png" alt="P&amp;L Chart from OptionsHouse" /></p> <p>It went from being down $275 to making $225 &mdash; all in one day! Talk about being filled with regret...</p> <p>Even when you&rsquo;re right and do the &ldquo;responsible&rdquo; thing, trades can turn against you. All you can do is learn your lesson and move on to the next trade.</p> <p><i>Disclaimer: I am an employee of OptionsHouse. LLC and the views and opinions expressed herein are my own and not those of OptionsHouse, LLC or any of its affiliated companies.&nbsp;This post is meant as an informational post and should not be construed as investment advice or a recommendation of any particular security or investment strategy.&nbsp;Any similarities between this hypothetical investment scenario and any actual investment results are unintended and purely coincidental.&nbsp;</i></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/carlos-portocarrero">Carlos Portocarrero</a> of <a href="http://www.wisebread.com/how-investing-drives-us-crazy-lessons-from-a-trade">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-common-investing-mistakes">7 Common Investing Mistakes</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/stabilize-your-portfolio-with-these-5-bond-funds">Stabilize Your Portfolio With These 5 Bond Funds</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-ways-to-reduce-your-tax-bill-with-bonds">4 Ways to Reduce Your Tax Bill With Bonds</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-things-your-financial-advisor-wishes-you-knew">7 Things Your Financial Advisor Wishes You Knew</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-ways-boring-investments-make-life-exciting">4 Ways &quot;Boring&quot; Investments Make Life Exciting</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment investing errors risk management trading options Fri, 30 Sep 2011 10:24:16 +0000 Carlos Portocarrero 714044 at http://www.wisebread.com 7 Common Investing Mistakes http://www.wisebread.com/7-common-investing-mistakes <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/7-common-investing-mistakes" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/5857159777_a9da686035_z.jpg" alt="ripped dollar" title="ripped dollar" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>We all make mistakes.</p> <p>Looking back on my years of investing, I notice some small and some big mistakes I&rsquo;ve made along the way.&nbsp; As I&rsquo;ve talked to other people, I&rsquo;ve found that others have made the same mistakes. In order to help you learn, I&rsquo;ve complied this list of the top investing mistakes. (See also: <a href="http://www.wisebread.com/investing-with-your-values" title="Investing With Your Values">Investing With&nbsp;Your Values</a>)</p> <h3>1. Starting to Invest Too Soon</h3> <p>Conventional wisdom says invest now, but there are <a href="http://www.wisebread.com/3-reasons-not-to-invest-now">reasons not to invest now</a>.</p> <p>Many new investors hear a story about some gal tripling her profit in three months and rush home to tell their spouses they need to start investing. Within a couple of days they own stock, but they don&rsquo;t know a lick about stocks or the stock market.</p> <p>There is a right time to start investing.</p> <p>Start investing when your finances are in order. For example, you might consider paying off credit card debt before you start investing.</p> <p>Start investing when you&rsquo;ve learned how to start investing. Don&rsquo;t invest in anything until you have at least a basic understanding of how that investment benefits you.</p> <h3>2. Paying Too Much to Buy and Sell</h3> <p>There&rsquo;s a great place to buy and sell stock, mutual funds, and index funds. You&rsquo;ve probably heard of it &nbsp;&mdash;&nbsp;it&rsquo;s called the Internet. Buying and selling online is so simple, and it is a competitive market. That means you can save some serious money by choosing an online discount stock broker.</p> <h3>3. Focusing Too Much on Fund Fees</h3> <p>You might think that #2 and #3 contradict each other, but we&rsquo;re talking about fund fees, not trading fees. Sure, fund fees are important. If you can get the exact same product for .5% fee instead of 1% fee, then that is a good choice.</p> <p>However, you might have one mutual fund that charges 2.5% management fee and one that charges a 1% fee. So which is better?</p> <p>If the one fund has an average annual return of 10% and the other 15%, then the 15% fund is better no matter the fees you pay to own that fund. Returns are more important than fees.</p> <h3>4. Discovering Your Risk Tolerance at the Wrong Time</h3> <p>Everyone has a high tolerance for risk when the market is going up. Hey, I&rsquo;ll take a risk to gain an extra 10% this year. But then when the market turns, you find out that you just lost an extra 10% because of the risk you took.</p> <p>It is often in the middle of a bear market that people decide to sell. They sell because their losses are greater than they anticipated.</p> <h3>5. Changing Your Investing Strategy Based on Market Conditions</h3> <p>Let&rsquo;s say a person was going to invest $100 every month for the year. However, after a couple of months that person sees that he has a loss, so he decides to stop buying until the market goes back up. It seems like that would make sense, but it is a very bad move. It means you actually pay more because you waited for the price to go up.</p> <p>In fact, that is one of the strengths of dollar cost average and value averaging &mdash; they can be effective in good and bad market conditions.</p> <p>Yes, you may need to re-evaluate your strategy based on market conditions, but don&rsquo;t let your investing approach change with every ebb and flow in the market.</p> <h3>6. Looking for Hot Stock Tips</h3> <p>If you listen to any talking head who knows which stock will skyrocket next month, you should run for your life.</p> <p>Investing hot tips are for movies. In real life, people realize no one can predict what&rsquo;s going to happen next. Don&rsquo;t believe me? Ask 100 investing professionals if the market will be up or down this year, and I doubt you&rsquo;ll find more than 10 people who have the same prediction for the same reasons.</p> <h3>7. Paying Outrageous Fees for Investing Advice</h3> <p>Several years ago I fired my financial advisor. The reason was that he would only advise I buy mutual funds that had a 5% front-end load. That&rsquo;s how he made his money. That&rsquo;s how I wasted money.</p> <p>Too many of us think professional financial advisors have some hidden knowledge. They don&rsquo;t. Getting financial advice is good, but just don&rsquo;t pay outrageous amounts of money for it.&nbsp;</p> <p><em>What other common investing mistakes have you encountered? Have you made any of these investing mistakes?</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/craig-ford">Craig Ford</a> of <a href="http://www.wisebread.com/7-common-investing-mistakes">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-7"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-things-your-financial-advisor-wishes-you-knew">7 Things Your Financial Advisor Wishes You Knew</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/learn-how-to-invest-with-these-5-stock-market-games">Learn How to Invest With These 5 Stock Market Games</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-ways-women-are-better-investors-than-men">5 Ways Women Are Better Investors Than Men</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-much-can-you-afford-to-risk-in-a-play-money-account">How Much Can You Afford to Risk In a Play Money Account?</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-investing-drives-us-crazy-lessons-from-a-trade">How Investing Drives Us Crazy: Lessons From a Trade</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment financial advisors investing errors learn to invest risk Fri, 21 Jan 2011 14:00:52 +0000 Craig Ford 463850 at http://www.wisebread.com