When investing, there are some avoidable mistakes that every newbie investor makes. Here are some common mistakes that one should avoid:
Investing without Understanding
Choosing a business that you are well aware of is crucial. The knowledge of the possible risks and the expected returns will aid decision-making. You also have a natural built-in advantage over other investors. The Balance, says that industry trends help in spotting opportunities to make great investment decisions. Anytime you can have an unfair advantage over most investors, you should press that advantage as far as you can.
A lot of us make the mistake of partially understanding investments. And rush into it so we don’t miss out on the best price. This may limit the returns as you may not understand when the right time to exit is.
Expecting Quick Returns
It is difficult or quite impossible to make quick money in the market. When you invest in a business, you need to understand that a business takes time to grow. The management makes decisions based on different factors. They come up with strategies on a timely basis. These decisions gradually contribute to business growth depending on the efficiency of management decisions. This can take months or even years so expecting quick returns is unrealistic.
It is important that investors have a lot of patience. According to LearningBull, Canadian investor Prem Watsa also insists on taking the long-term view. Investors are also not disciplined enough to handle fluctuations.
For example, Amazon stock was trading at $100 per share at the peak of the dot-com bubble in April 1999. It then crashed to $6.5 a share in November 2001 shedding 94% of its market value. The stock surpassed the $100 mark only after the 2008-09 recession and has since returned a phenomenal 3,000%.
A bear market or a market crash can surely bring an investor’s morale down. Amidst all of the negativity, some investors after witnessing a loss make the rash decision of selling their investments. While this is a very natural reaction, it is not the best one during a bear market.
Bear markets come around more frequently than one can believe. Making informed decisions about a business is the mark of a long-term investor. The best way to survive a bear market is to hold on to your investments during the recovery phase.
Timing the Market
If investors feel that there is a possibility of a market crash, they will immediately sell their investments.
Many investors and researchers believe that trying to time the market is next to impossible. The market is extremely unpredictable and it doesn’t make sense to make investment decisions based on uncertainty.
Investing in the stock market comes with risk attached to it. No matter how less or more the risk is, there is a possibility that you may lose your money. This is the reason why one should not be too attached to their investments.
Some investors also make the mistake of falling in love with their investments. Always remember, you bought this stock to make money. If any of the fundamentals that prompted you to buy into the company change, consider selling the stock.