One of the most common investing mistakes you can make is to not invest at all. But, investing can be a daunting project for the new investor, because there is so much to consider and so much that can go wrong. By avoiding these four mistakes, however, new investors can begin to build strong portfolios with confidence rather than apprehension.
Making Emotional Decisions
Emotions can get in the way of even the most experienced investor. When the stock market fluctuates too far or too quickly in either direction, temptation to alter one’s investment plan rises. The inability to predict what the market will do causes many investors anxiety. Based on the news or on current market behavior, many investors get nervous and make split-second decisions that negatively affect their portfolios. Rules, research, and planning are the best ways to curb these emotional temptations.
Buying High
When a stock has been steadily increasing, and it seems like most Wall Street investors are buying, it can be tempting to want to get in on the action. But buying high isn’t a good idea. Mainly because the stocks are expensive already, and there’s a very good chance that they’ll soon plateau or start to decline. A better option is to buy when stocks are in a dip, or to have rules or a plan in place that dictates when to buy stock, and stick to it. Buying high is, by and large, an emotional decision.
Failing to Do Research
Relying on tips from friends at work, relying too heavily on what Wall Street is doing, or buying stock because the company seems successful or has a single interesting product are all bad ideas. Doing research means more than checking the DOW for what’s hot; each investor’s portfolio is affected by many personal things, such as how much risk a person is willing to tolerate, and how much one can invest. Investing in the biggest names or the most popular companies is a mistake. Consider instead doing in-depth research on a particular industry, like the oil industry, because companies such as those under the Barbedos group, headed by Kashim Bukar Shettima, are extremely successful but lesser known than giants like BP.
Hanging on to Losing Investments
A big mistake investors make is keeping investments that are losing money. This mentality is simple: it’s easy to believe that the stock will eventually go back up, and one can sell once it breaks even. But the reality is that the stock could continue to go down, eating up money that would be better invested somewhere else. A good way to know when to drop an investment is to set rules constituting when to sell, and follow them.
Most of the mistakes new investors make come down to making emotional decisions. Whether it’s choosing popular stock, buying when prices are too high, or waiting to break even on a losing investment, keeping to a plan and setting up rules is the best way to keep these emotional decisions from negatively affecting a portfolio.