Investing in the stock market can be exhilarating or terrifying. You can make money or you can lose money. The difference between these two outcomes depends on whether or not you can avoid the most common pitfalls that so often destroy new investors.
Today we’re going to break down the easiest things to avoid while investing so that you don’t fall into any of the easily avoidable traps that snare most new investors. Now, what most don’t realize is that investing isn’t about being 100% correct about every trade — half the game is simply about avoiding obvious mistakes.
#1: FOMO Buying
Without a doubt, the number one way that new & experienced investors alike lose money is by getting caught up in market hype.
We’ve all been there: you’re watching a chart rip upwards, you’re seeing everyone else jump into it and then you finally decide to YOLO a few hundred bucks in because you don’t want to miss out on this once-in-a-lifetime trade.
There’s an old Wall Street adage that goes something like this: “When your cab driver tells you to check out a stock, that’s the time to sell it.”
If a certain stock is already going wild and doing laps on social media just accept that you’ve already missed out. Take a deep breath and remember that investing is all about controlling your emotions and finding stocks before they take off.
#2: Not Knowing What You’re Investing In
“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.”
Everyone’s favourite investing legend Warren Buffett is well-known for his aversion to investing in things that he doesn’t understand, most notably tech stocks and crypto…
Although this rule saw Buffett miss out on Microsoft and a couple of other 100X tech stocks when they were just starting out, it also meant he avoided countless companies that went bankrupt.
It’s very simple: if you can’t explain why you’re investing in a company to a stranger on the street, it’s probably time to revisit the ol’ thesis.
#3: Getting Stock “Tips”
Just because you get a recommendation doesn’t mean you have to take it. Everyone loves to hand out advice, especially in finance. While there’s nothing wrong with talking to your friends about what you want to invest in, buying because your mate said so is never a good idea.
Unless your mate has a proven track record of spectacular gains or he works on the trading floor of the New York Stock Exchange, it’s probably a safe bet to take any tips with a grain of salt… At the very least, do you own research and figure out whether or not it fits in with the rest of your portfolio.
#4: Not Taking The Right Risks
This might not seem like the most conventional advice for in a “things to avoid piece”, but it’s something that needs to be said, especially to younger investors.
While playing it safe and having the bulk of your portfolio in a stable ETF or index fund that tracks the S&P 500, it’s important to remember that a small, measured portion of your portfolio can and perhaps should be dedicated to high-risk, high-reward investing.
Most often, amateur investors take on risk in a haphazard manner and end up getting majorly burned because they dumped half their portfolio into a random penny stock.
Experienced investors allocate small segments of their portfolio to the riskier end of their thesis, because if it pays off… It pays off big time. And if it doesn’t – they’ve planned for this outcome and they can handle that loss.
TL;DR: be measured and thoughtful with risk-taking. If you’re young you can only afford to allocate no more than 10% of your total position towards risky plays (if you’re in a stable financial position and are capable of absorbing some losses).
#5: Ignoring Fees
This one might seem pretty obvious but tiny differences in fees can cripple your gains in the long run. This goes for brokerage fees on share trading platforms as well as management fees in managed funds.
If you pay 1% per year in management fees on a $50,000 investment that earns 7% per year over a 30-year term that’s nearly $100,000 in fees. If the fee drops just 0.5%, you pay closer to $50,000 in fees.
If you want to read up on which share trading platforms have the lowest fees and find the best broker for you, flick through DMARGE’s comprehensive review of the best share trading platforms here.
#6: Falling In Love With A Stock
“Never fall in love with a stock.”
A common disease that strikes almost all rookie investors is holding onto a stock that has been crashing for months simply because it surged in value when they first bought it. That first spike of dopamine when the price went up keeps them hoping that it will one day return to its previous price without ever bothering to check its fundamentals or looking at what others in the market are saying.
Always be aware of the strengths and weaknesses of the companies you’re investing in so that you can decide when to sell.