Many new investors start their investments with a traditional brokerage firm or a new brokerage firm using an “app.” Mistakes do happen regardless of how long you have been an investor or which firm you choose to invest with.
Mistakes generally fall into six categories. We will break down these categories and explain how to avoid these mistakes.
Not just looking at the short term
Short-term performance is speculative. It is the long-term performance that tells the whole story of an investment. It may be tempting to invest in short-term performance, but long-term performance measures like total return (capital gains plus dividends) are better investment indicators. Past performance is no guarantee of success, but it is often the only thing you can rely on.
Take a look at the company’s financial position you want to invest in and ask yourself these questions.
- Is the debt balance on the sheet too high?
- How is this company you’re investing in making money?
- Does the company make products that are becoming obsolete (think compact discs, DVDs, and before that, VHS tapes, vinyl records, and 8-track cassette players!) Are you a company that makes
Consider the risks
If you concentrate your investment capital in too few areas, you expose yourself to high risk. Conversely, suppose your investment capital is spread across many sectors of the economy. The problem is that performance can be poor or even more risky than if you invested in just one index, the S&P 500. If you are not familiar with the use of derivatives such as stock options, this is one place where you may want to educate yourself to reduce the risk of doing the wrong thing. Also, if you are new to investing (less than five years), you may be overconfident in your abilities because you have only experienced good performance in the stock market. It is essential to assess your experience and the level of risk you can take with your investments.
Diversify your investments
Have you ever heard the saying “never put all your eggs in one basket”? Well, this rule certainly applies to investments. The only way to reduce the risk of a particular investment is to put the “eggs” in different baskets. As with any trouble discussion, it is essential to note that if you diversify too much, you run the risk of underperforming or being riskier than the index that measures the stock market. The idea is to diversify across asset classes, including domestic equities (both growth and value), international equities, real estate investment trusts (REITs), precious metal mining stocks, high dividend-paying stocks, and non-dividend paying stocks. Don’t forget to invest in bonds for regular returns and income and cash accounts such as money market funds. Currencies and virtual currencies are highly speculative and require more research and monitoring.
Avoid paying commissions and fees.
There is little reason to pay commissions on investments in this day and age, whether in shares or mutual funds. And in the case of mutual funds, the fund’s annual management fee can weigh down returns, so look for funds with low costs (less than 1%) and certainly no upfront or deferred sales charges or 12(b)1 fee.
Timing is not everything.
This is a two-step discussion.
- Does the timing of this investment coincide with events in our economy and world, such as a pandemic, a change in tax law, or a change in who occupies the White House?
- Do we take advantage of the price of our investments, trading quickly to catch the rise and buying back when it falls?
The companies you invest in or trade with are not necessary; only the share price is. No one can time the market or the share price, but with the help of charts, you can know when to enter or exit an investment. Few professional investors can time the market, and most don’t even try; they set limits on their buy and sell prices. Greed can creep up on you, and without disciplined price limits, you risk selling too late or buying too high.
Be aware of your emotions as they greatly influence your decision-making.
If you are worried that the price of your investment is going up or down and you are not making the right timing decisions, then your emotions are probably getting in the way. If you are jumping into an investment and not getting a good return, you may want to get a professional to manage your investment. This is especially true if you are trading short-term using a new ‘app’ to make your investments. Buy and hold still has a reason to exist in this fast-paced trading world we live in now and allows you to eliminate emotion and focus on owning quality investments for the long term.
