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investor clinic

I've been writing about business and investing for about 25 years, and I've managed my own portfolio for almost as long. In that time I've communicated with thousands of readers – and countless friends and acquaintances – about their investing experiences.

So I think I have a pretty good handle on the mistakes that investors make. Today, I'll discuss some of the most common investing errors – and how you can correct them.

These are mistakes that I've seen over and over. (Humble admission: I've even made a few of them myself).

Thinking short term

Many novice investors (and even some experienced ones) aren't focused on how their portfolio will perform over the next 10 years. They're more concerned about how it will perform over the next 10 days, or 10 minutes. The obsession with short-term performance is counterproductive: It leads to anxiety, excessive trading, high commissions, taxes and – when you sell a stock that later rises – regret. The cure for short-term thinking is to build a diversified portfolio of solid, blue-chip companies or low-cost index funds and then get out of the way and let time and compounding do the work for you. You will occasionally need to sell an investment when the outlook changes for the worse, but these will be the exceptions, not the rule.

Not having a strategy

Successful investors don't all use the same approach. Some prefer the simplicity of index investing. Others enjoy the rising cash flow from dividend growth stocks or the analytical challenge of finding good companies that trade at low valuations. The important thing is to have a strategy (or a combination of strategies) that will impose discipline on your investing decisions. If you don't have a set of rules to guide you, you'll end up chasing after every investing fad or stock tip that comes along. That's speculating, not investing, and it generally doesn't work out very well.

Head in the sand

There are many fine investment advisers out there, but there are also those who will take advantage of clients by encouraging them to trade excessively or invest in products that are risky, laden with fees or both. Whether you manage your own portfolio or work with an adviser, it is critical that you educate yourself. Read books, websites and newspaper articles. Pick a strategy that suits your personality and stick with it (see above). Do not invest in anything you do not understand or which seems too good to be true. With investing, knowledge is power. If you lack knowledge, you will be an easy target.

Blinded by yield

Some investors look at the current yield and ignore virtually everything else about a stock – as in, "Company A yields 6 per cent so it must be better than company B that yields 3 per cent." Not necessarily. Maybe company A hasn't raised its dividend in years, has an unsustainable payout ratio or faces competitive threats to its business. Maybe it will cut its dividend and the share price will tank. Company B might actually be a better investment if its sales and earnings are growing steadily, which will ultimately lead to a rising dividend and higher share price. The yield is only one component of your return – never look at it in isolation.

Chasing returns

It's hard to watch everyone else get rich investing in whatever the hot asset class happens to be – one year it might be gold, the next year emerging markets or technology stocks. But if you chase after the best-performing stocks or sectors, you risk jumping in when assets are overvalued and poised for a tumble. In many cases, it's better to invest when assets are out of favour and the bad news has been "baked in" to the price. That's not to say every beaten-down stock is a bargain; some companies never bounce back. The trick is to identify the ones that still have a bright future despite whatever temporary setback they're facing.

Tinkering too much

Many investors believe that investing requires constant effort and activity to produce good results. They're never satisfied with what they own and are always looking for ways to improve their returns. But the truth is that – once you have established a diversified portfolio – doing nothing is often the best way to build wealth. I do very little trading, apart from reinvesting in my existing companies and ETFs when sufficient cash builds up in my account. It's about as exciting as watching grass grow, but it works.