If you’re at the beginning of your stock market journey, there’s a lot to look forward to. With that said, there’s just as much you’ll need to look out for, especially when it comes to classic rookie mistakes. But don’t worry. We’re here to help you reach your investing goals and avoid common pitfalls.
Here’s what to look out for when you’re preparing to go all in.
Going in Blindly
Investing without a plan is never a good idea. Still, first time investors do it all the time. The problem is, investments all vary greatly, including their risk-reward profiles. By going in blindly, you’ll likely sell yourself short. Know your investment objectives going in. And know what you’re investing in.
By having a good understanding of the type of company you’re investing in, you’re less likely to unwittingly invest in a company on its way to going bankrupt.
When it comes to picking the right stocks and avoiding the wrong ones, Warren Buffett once told CNBC’s Becky Quick, “Everybody, when they buy a stock, should be able to take a yellow pad and write down exactly why they plan to invest in that particular company.” The philanthropist/billionaire believes people should only invest in companies they truly understand, and it’s the rule he swears by as well.
Going in prepared also means coming with a plan for getting out. So you’ll need to come up with an exit strategy before you’re deep in the investing process. In other words, have a predefined strategy for deterring when to sell off your investments. Otherwise, you may wind up in a situation where you’re faced with risky options and very little time to choose. And when investors act in haste, they don’t always make the wisest decisions.
Investing in Recently Hot Stocks
Let what happened with Gamestop stock back in 2021 be a lesson to all looking to invest. To make a long and winding story short, Gamestop shares shot up over 400% in a one week period. Their peak trading point reached a staggering $483 per share, up from its 52-week low of $3.77. All of the sudden, people were jumping on the bandwagon and going all in. But this national news making moment was short lived. Those same shares currently sit at around $158 per share, marking a 67% loss for investors who bought them just a few months back.
Word to the wise, don’t chase hot stocks and base your investing decisions on minute to minute stock news updates. The stock market is always a long game, so do your research and invest with the big picture in mind.
For rookie investors, one of the most common mistakes is having only one stock and sticking to it. Again, you need set your sights on the bigger picture, and that will always include more than one stock. By playing long game, you’ll have a much better chance of getting back what you put in and watching your money grow overtime.
If you’re serious about investing, you need to be just as serious about diversification. When you diversify your investments, you’ll have a better scope of the highs and lows of the overall market. In contrast, if you invest everything into one stock, your chances of losing everything go up significantly.
Buying Stocks Based on a Recommendation
When it comes to stocks, everyone is going to have an opinion. That’s a given. But don’t let the recommendations from others cloud your vision. No matter how well they’ve done, only you can know what’s right for you. And all investing comes with risk. So trust your gut over theirs.
The person giving you helpful tips may even be right more often than not, but what they can’t predict is your level of risk tolerance. No matter what happens, it’s always better to fully take matters into your hands and base decisions off of your investment objectives.
Watching The Stocks Too Closely
Some people might suggest monitoring your investments daily, but don’t buy in. Generally, this proves to be one of the biggest mistakes investors make, and often when they least expect it. So no matter how tempting, give things time and schedule times to check in.
Because investing is a big picture process, long-term investors have no reason to watch every little shift in their portfolio. But rookie investors are notorious for it. The difference is that those seasoned in the stock market have a good sense of what’s going to happen over a long period of time. And what happens one moment to the next is not really indicative of how an investment is really going to do in the long run.
Over-investing in Your Company’s Stock
Even if this one seems like a bright idea, it rarely is. From WorldCom to Lehman Brothers, some of the most business savvy investors on earth have put their money into company stock and lost it all. Remember, tunnel vision is never a good thing. You shouldn’t put all of your eggs in any one basket, including your own company.
Not to mention, the company you work for already has full control over your wages. You may feel fully secure, but if you were to lose jour job, financial capital would still be tied in.
Investments will always come with costs. So before you invest, find out exactly what the fees will be. You should be fully aware what you’re paying for. It’s easy to get hung up on the jargon or breeze over some of the fine print. Having clarity will make the process closer to fool proof, so start by familiarizing yourself with investment costs.
Here are some commonly forgotten and frequently hidden costs of investing, compliments of Investopedia.
Investing is a marathon, not a sprint. In turn, patience is critical. Don’t expect stocks to go up as soon as you buy them. According to financial experts, the long-term average return for the stock market is about 10%. So if you’re banking on getting back what you put in, don’t expect very much on your average returns.
If you wish to reap the rewards of your risks and returns, you have to be patient to do so. And don’t jump the gun when it comes to selling. By holding out, you’ll be trusting the process and the rewards might be greater down the line. The stock market is always in a state of flux, so don’t be driven to act by what’s happening before your eyes. Wait it out.
Attempting to Time The Market
Timing may be everything, but market timing is one of the worst investment moves beginners most commonly make. Most who employ this “strategy” find themselves wildly disappointed. Per Go Banking Rates, one well-known study of Brazilian day traders for a two year period found that “97% of traders that persisted for more than 300 days lost money.” On Robinhood, another study found that users who based their investments on market forecasts showed an average 20 day returns of negative 4.7%.
If you’re new to investing, you might see market timing as a source of guidance, but it’s likely to lead you astray. Instead, read up on dollar-cost averaging. It’s a much safer and more stable approach to investing.
Risking Too Much or Risking Too Little
Not factoring in risk tolerance is a mistake almost all newbie investors make. In a nutshell, your risk tolerance refers to both how much risk you can withstand losing, what you can afford, and the investment risks you’re willing to take. Your personality is also a factor.
Because investing always comes with risk, you should only invest what you can handle potentially losing. This is another area in which your investing planning comes into play. Here are some things to ask yourself: How much of a loss are willing to endure within your portfolio? What are your investment goals and can you afford them when stacked against your income? What are you comfortable investing? Are you willing to wait a potentially long time to see returns?
Decide what you can tolerate before you roll the dice.
“Confusing Brains With a Bull Market”
If you’re well versed on Wall Street sayings, you may have heard someone say “don’t confuse brains with a bull market.” In other words, don’t assume you’re some masterfully skilled investor just because you’re up and stocks are still on the rise. If you’re investing during a bull market, it can make you look way better at the stock market game than you really are. So stay level headed and remember, the stock market script can flip at any moment.
Wondering what it takes to become a truly well rounded investor? Here’s some solid advice on from First Global’s Chairperson & MD, Devina Mehra: “One cannot be rigid, you cannot be married to a specific point of view in terms of sectors. Nothing does well always and so be flexible. Part of being a good investor is being flexible in terms of strategy and in terms of outflows and in terms of the sectors you look at or invest in.”