Investing in stocks is a lot like gambling. You’re investing your money in a product, business, or entity based on chance — no matter how much research you do. The reality is that the business world is incredibly unpredictable, making stock investing just as volatile.
But the great news is that plenty of money can be made when you make the right commitment by learning how to read the stock market. It also helps to know which errors in stock investments to avoid.
Read the rest of this blog to broaden your knowledge of how to invest wisely and avoid these common investment faux pas.
1. Failing to do Investment Research
One of the biggest mistakes you can make when investing in a particular type of stock is to go in blind. Or take someone else’s word for it that it’s a ”good investment”.
The bottom line is that you should always do your own amount of research on a company or particular type of stock you’re interested in. Another common error is investing in a company whose business model doesn’t make sense to you. If you don’t understand it, don’t invest in it, plain and simple.
One of the best ways to invest and avoid the above mistakes is to build a diverse portfolio of EFTs — exchange-traded funds. But if you want to invest in individual stocks, always do thorough research beforehand.
2. Becoming Too Attached to the Company
It’s easy to fall in love with a company and develop a strong attachment to it when your invested stocks are doing well. But remember that an investment is a business decision, it’s important to remain emotionally impartial. At the end of the day, you bought the stock to make money, not write a love a story.
Bear in mind that you must always keep your thumb on the pulse of the fundamentals of a company you’ve invested in. If anything changes that you don’t agree with, it’s worth considering selling your stock.
3. Forgetting That Patience is Key
When you’re new to investing it’s easy to become disillusioned by investments that just sit there, or fall behind in making you a profit like you expected. But remember that you must keep your expectations on the realistic side. Good portfolio growth takes time, and this takes patience from your end.
Investment is a long-haul game. You will yield greater returns over the long term if you adopt a slow and steady approach to watching your money grow.
4. Jumping In and Out of Investments
Nothing can eat away at any money you make like jumping in and out of investment positions. Even if you’re an institutional investor paying low commission rates, jumping investments can damage your profit margins. Whether you’re spooked by market changes, impatient with slow growth, or want to try an alternative investment platform, doing it too often is a bad idea.
Basically, you have to pay transaction costs each time you withdraw your stocks, as well as short-term tax rates, and commission rates. This is why a slow, sensible, and steady approach is far more profitable over the long term.
5. Trying to Time the Market
There is very little success in attempting to time the market. This means that you try to read or predict what the market will do before it actually happens. Ultimately, you might withdraw and sell your stocks at the worst time, or for no reason at all — which results in losses, sometimes dire losses.
Successfully predicting the market is very difficult and often never goes to plan. Even the experts get it wrong on a regular basis. The bottom line is that most of your portfolio return comes from your asset allocation choices. Timing and security selection do not guarantee success!
6. Not Recognizing Your Losses
Granted, it’s difficult to accept a loss and move on. But trying to ”get even” by waiting for your stock to return back to its original cost basis, then selling it, doesn’t do you any favors. This is called a cognitive error — when you fail to recognize and accept a loss.
As an investor, you’re actually losing twice. The first is by failing to sell a loser (poor-performing stock) when you should have. The reality is that its worth could slide even more, becoming worthless to you. The second is that you’re losing out on the opportunity cost of withdrawing and using those investment dollars elsewhere.
7. A Lack of Diversify
As mentioned, the best way to build a great performing portfolio is through diversity by investing in EFTs or mutual funds. Just ask Warren Buffet, he knows. If you don’t have experience in investing in individual stocks or concentrated positions, it’s best to avoid it.
Diversification gives you a greater range and better chances of building growth in your investment portfolio. Sure, you might experience some losses, but with diversity, you have more opportunities to build wins.
Allocate time and money to all major spaces, sectors, and industries but try not to allocate more than 5-10 percent to more than any one investment.
8. Making Emotional Decisions
We’re only human, and when it comes down to it, we’re all guilty of making decisions based on emotion. And when there’s money involved, it doesn’t get more emotional than that.
But this is the ultimate investment killer. The truth of the investment market is that greed and fear fuel the beast, but it’s important to not get caught up in this. Do not let either of these emotions control your decisions.
Yes, the stock market is a volatile place. Your returns might deviate in such an unpredictable way that it’s difficult to not become emotional. But overall, the market always favors patient, business-minded investors.
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Whether you’re new to stock investing or you’re a seasoned pro, it’s always a good time to update your knowledge and grow your investing acumen. Investment tactics change at a rapid pace, as does the market, so it’s up to you to keep abreast of these updates and avoid costly errors in stock investments.
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