Don’t Sabotage Your Investment Success By Giving Into Greed

Many investors sabotage their long-term returns by giving in to greed. Usually, this happens when they are young and impatient for results - which is ironic, because this is the most important time in your life to invest properly.

An experienced investor realizes that investing is a life-long process that yields big dividends over decades. Most of the profits come from compounding - i.e. the return on money that was itself a return on your principle. Therefore, it is critical to invest effectively as early as possible.

When a seasoned investor looks back on a ten-year-old investment mistake that, at the time, cost them $10,000, they realize that they actually lost more than $10,000. They also lost the compounding power of all the dollars that would have been spun off from the $10,000 over the course of the decade.

Unfortunately, when they actually made the mistake, they were not thinking of the consequences ten years down the road. Instead, they were most likely thinking of getting rich NOW, and made the mistake by being too aggressive and reckless.

Here are some of the common mistakes that young, aggressive investors make:

1. Day trading - Technically, day trading is buying and then selling a stock in the same day. In practice, this term is also used to describe aggressive short term trading where a trader jumps in and out of positions within days. Either way, this is a mistake for most people because stocks are harder to predict over the short term, fees are higher relative to profits, and traders are more vulnerable to technical glitches outside their control.

2. Futures and options trading - Most investors should avoid trading these products because they are highly leveraged. For example, corn is actually less volatile than a stock. This makes sense, because there are more factors that influence IBM than a simple food like corn. However, while you can buy a single share of IBM, you cannot buy a future on a single ear of corn. Instead, you have to buy corn contracts of 5,000 bushels each. Trading these large quantities means that you make or lose a lot of money with small, random price fluctuations.

3. Excessive position sizes - This is when an investor does not diversify. For example, they see Google going up, so they invest all their money in Google. This is reckless, dangerous, and a form of gambling - not investing. You never want to be dependent on one stock, because anything outside your control can happen. Instead, you want to create a method that gives you an edge over the market, and then use this system to trade multiple positions to guard against factors outside your control.

4. Leverage - Related to 2 and 3, you want to avoid using leverage. You should assume that there is a 100% chance that your investments, at some point, will fall in value. If you used borrowed funds, you might be forced to sell positions at a bad time. It is better to use your own funds and be in change of your own destiny.

5. Excessive turnover - This is when an investor panics and sells a stock on a short-term dip and/or sells a stock after a small gain. Many times, the stock will come back up, and the stock that made a small gain will continue to climb. The best way to invest is to eliminate all-or-nothing thinking. Instead of buying or selling an investment all at once, create a method to buy and sell stock in increments.

6. Seminar junkie - This is where an investor gets hooked on buying books, DVD's, and seminars on trading and investing. An investor falling in this trap is like someone who pursues multiple graduate degrees in college because he or she is afraid of actually attempting something. It becomes a form of entertainment to learn new technical indicators or trading systems. The problem is that you lose time and money that could have been better spent.

7. Don't quit your day job - If you have investment success, you may be tempted to quit your job for a year or two and live off your profits. Don't do it! Keep working until you have 20 times your salary. At that point, you can realistically hope to live permanently off your portfolio without exhausting it.