Are you someone who invests most of his/her time keeping an eye on the stock performances? Are you someone who wishes to earn some fast cash through stock investments? If yes, then this is for you.
As a regular stock investor, you may come across various situations where different stocks perform differently. And because of this, you may not know, but you may end up making mistakes or get on the wrong track. This can result in a loss worth a million dollar. To avoid any losses, make sure you know these mistakes well in advance.
1. Investing Big on Short-term Stocks
Investing big money on the hot news that just read on the news website definitely doesn’t come in the category of investing. The future return from stocks is based on many factors which should be carefully studied rather than investing based on single news of a quarterly jump of EPS of a company by 40% or launch of a new hyped product. Serious investors should perform detailed qualitative and quantitative study rather than investing based on short-term market twitches. Market psychology is hard to predict in short-term as sentiments drive it (similar to voting machine). On the other hand, long-term results can be measured concretely, if the studies are done correctly (like weighing machine). Focus on the long-term performance of the stocks, rather than short-term turbulence.
2. Following the Big Guys
There’s no harm in making someone your role model and taking inspiration from them for your stock market investments. But you need to be careful and make sure that this inspiration doesn’t become blind faith. It’s challenging to understand the exact strategy of the big players of the market, no matter how carefully you track their investments. Moreover, a regular investor cannot match the resources available to big investors. Investing blindly in what big guys are purchasing is undoubtedly a sign of gambling in stocks. Some stocks may work well for them, but that doesn’t mean they’ll be advantageous for you too. After all, they have a different strategy than yours. Plus, luck plays a vital role too.
3. Following the Crowd
When you hear about a popular investment that’s shooting up in value, you may be tempted to hop on the bandwagon. But this isn’t a good way to pick where you put your money. “Hot” stocks may rise rapidly, but they can fall just as rapidly. And you might invest when the price is high, and it later falls. Everyone wishes they could get rich quick off a smart investment, but when you’re talking about your life savings, caution is paramount. It’s possible that the latest craze could be a smart move for you, but it’s equally possible that it’s a bad move. You won’t know until you investigate for yourself to decide if it’s a good long-term choice. Speak to a fee-only financial advisor if you’re unsure how to choose wisely on your own.
4. Putting All in a Single Stock
Investing all your money in a single stock is the worst form of management in stocks. Maybe it seems a great opportunity now. However, there can be thousands of reasons which may prevent the stock from performing. And if that stock doesn’t perform as you wished, for whatever reason, all your hard-earned money will be gone. Putting all in a single stock magnifies the risk. The wise approach for intelligent investors is to diversify their portfolio. Make a note of all the well-performing stocks, shortlist a few, and invest in different stocks to keep the risk to a minimum. You should also invest your money in several different industries, so if one suffers a hit, it doesn’t devastate your entire investment portfolio. As the old ones used to say – “Do not put all your eggs in one basket.”
5. Ignoring Your Risk Tolerance
An investment product can be a good fit for someone else and a bad choice for you. It all comes down to your risk tolerance. This generally declines as you get older, because if your investments drop in value, you may not be able to wait for them to recover before you need to begin drawing upon them. It doesn’t make sense to invest heavily in high-risk stocks when you plan to start spending your retirement savings in a few years. But if you’re young, you may be able to afford to take a few more risks. No matter what your risk tolerance, always remain well diversified. You may want a more stock-heavy portfolio when you’re younger, but as you age, you should transition more of your money to safer areas, like bonds.
6. Trying to Time the Market
Some investors stay fully invested in stock funds while the stock market is rising, then jump quickly into the money market or cash equivalents just before stock values begin to fall. For this strategy to work, investors must know precisely when to get out of stocks. And precisely when to buy back into them. Always. If you build a portfolio that meets your long-term goals and considers your risk tolerance, you can stay invested. Even when the market is volatile.
Be aware of what can go wrong if you make these mistakes. You surely don’t want to end up losing all your investment or most of it. Hence, it is advised to work with a reputed financial advisor who will help you with every step. But don’t forget to go by your instincts too. Professional assistance and your instincts will help you become a successful stock market investor.
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