When it comes to investing in the stock market, one must know that this is not a more straightforward mutual fund or fixed deposit investment. You must do substantial homework and able guidance from the experts in this field. A lot of the new investors make some prevalent mistakes unknowingly.
Though one can make common mistakes if he can recognize them to avoid the pitfalls, we will discuss the most common mistakes made by beginner traders.
- Not getting proper knowledge – Most beginners get carried away by something they do not know and invest in the wrong plan. The investor must understand the business model properly to invest in it; otherwise, it will fail. World’s successful investor Warren Buffet advises investing in the companies whose business model is studied by the investor. Building a diversified portfolio of exchange-traded funds (ETF) or mutual funds is an excellent solution to avoid this mistake. To invest individually, you must get the knowledge of the stocks it represents.
- Liking the company’s growth – You may observe the company’s well-doing in which you invested, and it can happen that you will love to be with it whatever it comes. You ought to forget that you have invested in making money. Therefore, it is a must that with the current changes, you need to change yourself. It was stated, if any of the fundament operatives that prompt you to buy into the company change, please think of selling the stock.
- Not being inpatient – If you want to play along, you need to be patient. A slow and steady approach to portfolio growth will give you better results than hasty decisions in the long run. Let the portfolio do what it is designed for instead of expecting something else from it. Your thought process and expectations must align with reality and the growth & returns concerning the timeline. Never try to deviate from the path of the portfolio.
- Stick to the primary one plan – If you are going up and down with too many plans and change frequently, it is not going to help you any good. The transaction costs are too high, and you will invite the disaster to you. The short-term taxes and opportunity cost on a long-term plan will eat you out. Suppose you are not an institutional investor who has the benefit of low commission rates. In that case, you are not advised too much turnover or entering and logging out of positions because it will kill your return potentials.
- Trying to time the market – The study covering American pension fund returns “Determinants of Portfolio Performance” conducted by Gary P Brinson, L. Rudolph Hood, and Gilbert L. Beebower, reveal that on an average, 94% of the variation of returns over time was explained by the investment policy decision. It is never easy to time the market, and it kills your returns. Even reputed institutional investors often fail to time the market successfully. Most of a portfolio’s return is explained by the asset allocation decision you make, not by timing or security selection, the right term in case you are a layman.
- Waiting to get even – If an investor fails to realize a loss, he loses it in two ways. First, by avoiding selling a loser, which may continue to slide further till it becomes valueless, and second, there is the opportunity cost of a better use of the investment. Therefore waiting to get even will be a disaster and a significant loss for you.
- Not able to diversify – Common investors should not try to invest in few concentrated positions as this is not going to help them in long-term returns. Some professional investors adopt this method and generate alpha (excess return above a benchmark) but can manage it because of their expertise. A typical investor needs to stick to the principle of diversification. It is vital to allocate exposure to all significant scopes to build an exchange-traded fund (ETF) or mutual funds. As a considerable thumb role in individual stock portfolios, don’t allocate more than 5% or 10% to any investment.
- Letting the emotions get on top – Fear and greed rule the market. You should not let your fear or greed control your decisions. There will be a deviation in the stock market returns for the short-term, but the returns can cover about 10 percent for the long-term. Also, a portfolio’s returns should not deviate much from that of the average return for a long-time term. Avoid irrational decisions based on short-term deviations and stick to the long-term portfolio. That is the best advice to a wise investor.
One must determine his goals proactively to get the appropriate returns. Seek qualified professional help if you are a layman in this field. Opt for the automatic plan. Invest not more than 5 or 10 percent of your investment fund in the portfolio of a long-term strategy.