Common Investing Mistakes
The behavioral traps that cost more than picking the wrong stock · 13 min
+100 XP for finishing the Knowledge Check below
No new math here — just the concepts from Lessons 1–6, especially diversification and index funds.
The Biggest Risk Is Often You
Dalbar, a research firm, has tracked the gap between what the S&P 500 actually returns and what the average investor in stock funds actually earns, for decades. The average investor consistently underperforms the index they're invested in — not because their funds are bad, but because of when they buy and sell. This lesson isn't about a formula. It's about the handful of predictable, well-documented mistakes that quietly cost investors more than almost anything covered so far.
Mistake 1: Trying to Time the Market
The instinct feels obvious: sell before it drops, buy back in before it rises. The problem is that the market's best days cluster right around its worst ones — a huge share of the S&P 500's long-run return has historically come from just a handful of days a year, and they tend to arrive in the middle of the volatility that scares people into selling in the first place. Miss even a few of those days trying to dodge a downturn, and you can permanently damage a multi-decade return, even if you were right that a crash was coming.
Mistake 2: Chasing Last Year's Winner
Whatever sector or stock had the best headlines last year attracts the most new money this year — and that money often arrives right as the trend is running out of room. This is performance-chasing, and it's the mirror image of the buy-low-sell-high goal: buying after a big run-up and selling after a big drop is buying high and selling low, done unintentionally, one emotional decision at a time.
Mistake 3: Under-Diversifying
Lesson 5 covered why diversification is close to a free lunch — company-specific risk can be diversified away at close to zero cost. Plenty of investors skip it anyway, loading up on a favorite stock, their own employer's stock, or whatever's trending, because concentration feels more exciting than a boring index fund. It also means a single company's bad quarter can undo years of otherwise-solid decisions.
Mistake 4: Letting Fees Quietly Compound Against You
A 1% annual fee sounds trivial. Compounded against you for 40 years, it isn't — Lesson 6's math runs the same direction whether the extra return is working for you or a fee is working against you. Two funds tracking the same index, one charging 0.03% and the other 1%, can end up tens of thousands of dollars apart on a moderate long-term portfolio, for identical underlying investments.
Every fund publishes an expense ratio. It's one number, and it's the single easiest "mistake" on this list to simply avoid — compare it before you buy, not after.
Mistake 5: Confusing a Good Company with a Good Investment
A company can be genuinely excellent — great product, great management, growing fast — and still be a bad investment if the price already assumes all of that. Valuation (Lesson 4) exists precisely because "this is a great company" and "this is a good price to buy it at" are two separate questions, and conflating them is one of the most common ways enthusiasm turns into a loss.
The Actual Fix: A Plan You Don't Have to Feel Good About
Every mistake on this list has the same root cause: a decision made in the moment, under emotion, instead of ahead of time by a rule. The three-fund portfolio and annual rebalancing from Lesson 6 exist for exactly this reason — a plan set in advance takes the in-the-moment decision out of your hands on the days you're least equipped to make it well.