Avoid These 4 Stock Market Mistakes

Here’s how to prevent the investment errors I made.

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I've been investing in the stock market for 40 years. In that time, I've gotten lucky with a few winning bets, but I've also made my share of mistakes.

Of course, it's easy to figure out what went wrong in hindsight, and much harder to foresee what can go wrong ahead of time. No matter how smart you are, or how much advice you take, there's an element of gambling in any investment. But if you avoid these four mistakes I've made, you'll be tilting the odds in your favor.

Mistake 1: I bought what I didn't know. Remember those old Memorex ads that shattered glass? "Is it real, or is it Memorex?" Memorex, a 1970s computer company, was one of the first stocks I ever bought. I believed I was on the cutting edge, and all I had to do was buy this stock, sit back, and get rich. What did Memorex do? I had no idea. I was an English major in college. But it did shatter glass!

When the stock went from $100 to $60, I thought the world just didn't appreciate the wonderful things Memorex did. When it dropped below $30, I figured it was so low it was too late to sell. I complained to friends about Memorex. They, too, had seen the shattering glass ad, but had no idea how Memorex made money. In fact, Memorex didn't make much money. I finally sold at $30 a share, and I'm glad I did because the stock continued to slide until the company eventually filed for bankruptcy.

I've bought a few other stocks when I had no real understanding of what product the company made or what service it performed. I've repressed the memories of a lot of those trades. I lost money in most of them. But Memorex is the one that still hurts.

Mistake 2: I bought a stock because it was down. Time Warner was a high flier in the 1990s, cresting to over $80 a share. It tanked after it merged with AOL. I watched the shares sink to the $60s and then the $40s. When they got to $20, I decided they couldn't go any lower and stepped in.

I knew this company. At the time I used AOL mail. I had a subscription to Time magazine. I went to see Warner Brothers movies. I was betting the company would make a comeback. And in some ways the company has made a comeback. But I watched TWX continue to dive to $15, then $12, then below $10. I sold my position in 2007, when the stock briefly came back to $20. In the end I didn't lose that much, but my money was held hostage for five years. And, by the way, while TWX currently sells for about $36, because of a 1:3 reverse split in 2009, the shares I had would still be worth only about $12.

Mistake 3: I sold too soon. I bought shares of the medical device company Becton Dickinson in the 1990s. It was a good company producing fine products. I held my shares for several years and doubled my money. But I didn't want to get greedy, so I sold my position. After I sold, BDX went down slightly, then resumed its upward trajectory until the stock doubled again. Even during the worst of the 2008 and 2009 bear market, BDX never went back down to the level I'd sold it for a few years earlier.

I could tell a similar tale for several mutual funds I've owned. They were good funds that rose in price, but I got spooked and decided to sell, only to see the shares continue to go up without me. The lesson is: If you hold a good company, or a proven mutual fund, don't sell just because the shares go up. Only sell if something goes wrong.

Mistake 4: I didn't take enough risk when I was young. This may seem like a strange regret, after having just experienced the mother of all bear markets. But, in reality, I was too conservative an investor when I was in my 30s and 40s. I kept half my 401(k) plan in money-market funds because I worried about the next economic crisis. We did have a few crises, but now, all these years later, those crises, like the one in 1987, are mere blips on a screen.

There are always going to be blips on the screen. But over the long run, the stock market has produced an average of about 7 percent a year. And you're better off making 7 percent in stocks or stock mutual funds, even with those blips, than you are burying money in a bank account or money-market fund.

Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.