Over the years I have come to the conclusion that successful investing is as much about avoiding mistakes as it is about being an expert stock picker. Or in the words of Warren Buffett: “you only have to do a very few things right in your life as long as you don’t do too many things wrong”. If we can minimise our investing mistakes then achieving decent returns becomes far less dependent upon finding those inspired stock picks.

Unfortunately it seems that we only really learn from our investing mistakes when hits us where it hurts: right in the pocket. Wouldn’t it be nice if, when we all started our investing journey, we were able to learn from other people’s bitter experience? Well based on a combination of my own experience and reading and observing other investors I have set out below a list, in no particular order, of what I believe to be 12 of the most common mistakes made by dividend investors.

1) Over-diversification

Diversification is a good thing, but too much of a good thing can be bad for you. Diversification up to a point is essential in order to reduce exposure to both company specific and sector specific risk, but after a point the law of diminishing returns kicks in, or ‘diworsification’ as it is fondly called in investing lingo (originally coined by investing legend Peter Lynch in his book ‘One Up On Wall Street’). People will disagree on when the benefits of diversification are eliminated and mathematical studies have shown that the benefit of further diversification becomes very little once you get past about 8 shares. Now that’s a little low for me and I’d prefer to use a more down to earth ‘sleep at night’ test; although in my view there is no need to exceed about 20 shares.

But that’s when some investors get carried away and forget that they are investing rather than stamp collecting. When it comes to investing, philately will get you nowhere. After a while you simply start running out of your best investment ideas: would you really be committed to holding the 31st best idea you have? All you do is increase the likelihood of diluting the quality of the portfolio with inferior shares and furthermore the portfolio will become more expensive and time consuming to run as the number of holdings gets very large.…

Unlock the rest of this article with a 14 day trial

Already have an account?
Login here