1. You are cutting your winners short.
Many investors will cut a winner short if they see a green day that nets them multiple percentages outside of a normal average true range. Stocks that are on a winning streak rarely turn south without any significant news which would impact their future earnings potential. Let your runners run.
2. Holding your losers too long.
You should keep a trailing stop on all of your stocks of 10%. What happens to many investors is they believe a stock will turn around, much like we discussed in 1. In the same way that a winner can run indefinitely, a loser can fall indefinitely. Do not let these losers free fall out of control. Cut them to just 10%.
3. Poor position sizing.
If you are overexposed to one sector or one stock in your portfolio, you are taking an unnecessary risk. Simply put, you can destroy your entire portfolio in a matter of days with a runaway position that consists of an oversized position in a high beta stock. Allocate no more than 5% of your total portfolio to these high beta stocks- otherwise you run the risk of overexposure and massive drawdowns.
4. Investing without having risk in mind.
A rising tide lifts all boats, and it is very easy to forget about how quickly and violently the tides can turn against you. Aggressive positioning in high beta, or adding leverage can increase your returns, however, this comes at a cost. Adding leverage in the form of margin will cost you in fees to your broker, as well as unnecessarily risking capital you do not have. Many brokers (E*trade) charge upwards of 10% APR for margin. This should be avoided at all costs. You aren’t here to make your broker rich.
5. Investing without thinking long term.
Many investors will try to time the market and invest for some quick short term profits. Trying to time short term fluctuations in the market is a crap shoot- there are people who may try to sell you the idea that they have a market timing algorithm that can tell you when to buy and sell for easy money. Don’t fall for these snake oil salesmen. Timing the market is a fools errand- Investing with a time horizon of multiple years will err you on the side of higher returns. You want to be investing with the odds in your favor- with a short time horizon, the odds are stacked against you.