e all know that investing in the stock market can be a great way to grow our wealth. But we also understand that this can be extremely risky if we don’t
know what we’re doing.
When in doubt… think again, or ask for a piece of advice from a professional. In the stock market, decisions are waiting for us at each corner, and it’s impossible to have an investment journey without any doubts and investing mistakes. But that is good news.
We can learn a lot if we acknowledge where we fell short in the past, and we’ll make better decisions in the future and avoid as much as possible investing mistakes. One way to make better decisions in the future is to avoid the mistakes that others encountered before you. And since there are a bunch of common investing mistakes, we are sitting on a gold mine of learning potential.
Let me tell you this - not investing is even worse than investing and making mistakes!
We all feel the effects of inflation, where year after year, we can buy less with the same amount of money. Now, a smart way to spare aside some money and also cover it from the annual inflation would be investing. After all, investing in financial markets like the stock market, for example, can get us annual returns averaging up to 10%.
That is keeping in mind the long-term aspect of the game because things might look different on a year-to-year basis. However, we should always remember that keeping cash reserves that we can use in worst-case scenarios, like losing our job, is the first thing to take care of.
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Keeping money that you can spare in an investment portfolio can help you benefit from the snowball effect. What that means is that your investments can benefit from the compounding interest effect, where reinvesting the amounts of money you receive annually as dividends and interest back into your portfolio will lead to higher amounts received every year and so on.
Let’s do an exercise of imagination: you just gained some money – be it your hard-worked money, it’s a gift from your parents, or you just inherited it. You’ve always been interested in the stock market, but you’re yet to get some experience. However, now that you’re in possession of this money, you decided that it’s finally time to get into this world. So, what’s the first thing you should do? Invest your money, indeed. Don’t keep them under the mattress. But make sure you put aside a certain percentage of it so that you won’t be disappointed in case things don’t go as planned.
With that being said, at the same time, you shouldn’t put all your money in a single place!
We have all heard this before, but “keeping all your eggs in one basket” is a mistake so crucial in its ease to be avoided. Believe it or not, many investors got to see their accounts go bankrupt just by failing to diversify their portfolios.
It’s mind-blowing how easy it is to diversify nowadays. We have a variety of mutual funds to choose from, where experts deal with all the hard parts of choosing companies, index funds like the S&P 500, Nasdaq 100, and so on, and even exchange-traded funds (ETFs). Examples like this are tremendously reducing the risks of losing one’s money through a bad stock choice.
We can also do the hard work ourselves and choose our own companies. The recipe for success revolves around choosing multiple companies from the same industry or different companies from different industries. We can think of it this way - not keeping a diversified investment portfolio is like sailing without lifeboats. If the ship sinks, we go down with it.
Going back to the example, let’s say that you decide to invest in a stock that you believe will do well. But just in one stock. At first, it seems as if your investment is paying off. The price is on the rise, and you feel confident in your decision. Happy times! However, after a few months, because of how volatile the stock can be, it starts to decline. But because you invested in only one stock, you don’t have any other options. This is a risky investment since if the stock doesn’t perform well, you could lose all your money.
However, if we see our stocks going down, we should go back to the big picture.
When we make an investment without properly researching it first, our mental well-being can be in serious danger. Can you imagine being calm when the whole market goes down during a World Pandemic crisis if you do not have the backup of your own beliefs? Back in 2020, many investors who failed to keep in mind the big picture just sold at a loss and went home defeated. It was no surprise that after a while, the market’s curve took the upward road again, and the people that got out regretted it.
I am not saying that if your ship is going down, you should go down with it. But rather, when in doubt, think about why you believe this company/industry is going to perform well in the long term, all based on serious research done by you or a professional collaborator. This takes us to another very serious mistake to avoid.
Now that the stock is going down, it’s essential to remain rational. You might start panicking and act on impulse, so you sell all of your shares at a loss. But you need to focus on the long-term performance of your investments rather than the short-term fluctuations in the market because, most of the time, this is normal. Remember! The prices will always go up and down over time. So, take a step back and focus on the future. Don’t let anyone or anything influence you!
Make your own choices or listen to the shepherd. In other words, don’t buy or sell stocks based on short-term market trends.
If you’re thinking, “GameStop short squeeze”, that’s right. Examples like the 2021 stock market event, where a lot of people lost money due to unprecedented FOMO, are happening all the time. It’s just that the scales are lower. It’s true, a lot of people do make money from hyped events like this. However, the problem appears when we get the hot news through the common media channels about some upcoming prices of stocks that we don’t know anything about. In such cases, we can expect the stocks to be overpriced already.
Some people go for one hyped event like the GameStop short squeeze and end up losing money, never investing again because of that. Some will even try again on another hyped event and fail again. However, if we want to have a long-lasting and successful investment pathway, we do need to make informed decisions for ourselves.
Whether it is through videos, articles, news, books, or just choosing to talk with a professional, consistency in financially educating ourselves is the key to long-lasting success. Think about information as you’d think about sharpening stones. Our instincts are just like a sword. I, for one, wouldn’t go to a battle with a blunt blade sword.
Back to our imaginary scenario – you decided to invest in a stock, but you panicked, and you sold your shares fast. Rookie mistake, it’s okay! But a few days later, Elon Musk just tweets about investing in this company, and automatically, the value goes up. So what do you do? You don’t want to miss this opportunity, so you rebuy the shares that you recently sold, but this time at a higher price. This type of behavior is known as “emotional investing”, and it can be detrimental as you’re making decisions that, without FOMO, you wouldn’t have made.
Moving forward, investing inconsistently and with money that we can’t afford to lose is bad practice.
If you find yourself looking for the perfect moment to enter the market and want to focus on the “buy low, sell high” strategy, I’m going to tell you there might be a better solution. You might be surprised to hear that, as investors, a really smart approach for choosing when to buy is actually buying stocks constantly. There can’t be such a thing as “the best time for investing,” and we can’t tell for sure where the market is going to be next week, but what about next month?
So, to avoid uncertainty, there is Dollar Cost Averaging (DCA). What this means is that we set an amount of money that we invest monthly, no matter how the market behaves at a particular moment. Over a year, for example, we would have bought the lowest and the highest prices, respectively, meaning that our actual price for the whole period would be the average of all the buy-ins.
Trying to save up money for your future is a good practice that all of us should be aware of and working towards. We must keep in mind that investing money in the financial markets should ALWAYS come after we secure an amount of money in liquid form that we can dive into when in need.
So, when you get a hold of a certain amount of money, don’t just go blindly without any research or just invest in a company you know nothing about. Before you start investing, research the company, industry trends, talk to other investors. Do everything so that you’re protecting your money, not wasting it on risky investments.
Besides our urgency fund, the stock market can be a great option to continue to save exponentially more money. With that being said, we should continue making informed decisions and always look to get our financial education upgraded to avoid mistakes that could otherwise be so easily avoided.
By
George King
•
November 11, 2024 9:45 PM
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