This is a quick overview of some of the most common mistakes that beginners make when investing in stock markets.
When I first approached investing, I was totally overwhelmed by the amount of information out there. There were thousands of “advisors”, all telling me different things.
In my recent post 5 Things you thought you knew about investing, I showed some common misconceptions that keep people from ever even trying. In this post I’ll highlight some mistakes that almost all investors make, in the hope that you may avoid the same pitfalls.
I have, on occasion, made these mistakes too, as I trade options on a daily basis. It isn't unusual for human nature to take control, send all logic out the window, often with bundles of my hard earned cash to boot!! So don't feel embarrassed if it happens to you too, we are all human, and fear is never far away when money is involved.
It is not unusual to turn on the news and hear about record growth in this stock, or that Crypto-currency. Advisor after advisor comes on telling us of the phenomenal growth that is almost guaranteed for those who buy shares. Everyone is buying it and it is growing ‘exponentially’. They are even recommending it to their mother… They talk about rocketing revenues and great profit margins.
These things all sound great, but it is company stock. It's not a lottery ticket. Nothing grows to the sky, buying a stock because it is going up is madness. What does the company actually sell?
In 2020, when we all got locked at home for weeks and sometimes months on end, the stock being bought by everyone was Peleton (PTON). Sales had sky-rocketed for the firm, because we all needed to exercise, but the gyms were all closed.
Social media lit up with people challenging each other to virtual workout sessions and the hype grew and grew…
The stock was one of the most recommended on Wall st. until people started to realize that the pandemic will eventually fade. The pandemic was an entry point for many new ‘retail’ investors (that is a nice way to say not professional). Retail investors were being paid to stay home and in some cases were financially better off, so they started to try to make money on the market. Unfortunately, many sought advice on social media. A Meme stock frenzy started. People were buying because other people were buying. That is not a safe investing strategy. People are fickle. Reddit posts very rarely discussed what the company actually did, just what the stock price was doing.
Know what you are buying and then ask yourself is this a fad or will it be around in 20 years time?
2. Spread your risk - Diversify! (Egg's-Basket-etc!)
I mentioned my mother getting caught out in Elan pharmaceutical in my previous post, Why follow the Investor Gym?
The reason she was caught out was that all her investment was in a single stock, and disaster can strike any stock at any time (and it did!).
Even the most respected company can have a disaster. A faulty product like the Boeing 737Max can ground flights worldwide for years! Boeing is one of 2 major airplane manufacturers. Airbus is the other. You would imagine an investment in Boeing was pretty safe, but the fault that caused two fatal crashes took a large part of their business into the penalty box from March 2019 to Dec. 2020.
3. Don't try to ‘Time the market’.
The stock market goes up and down all the time. It does however go up much more often than it goes down. If you try to wait for a stock to revert to a previous ‘good price’ it’s quite possible that you will never own it. The best approach is to use a system called Dollar Cost Averaging. This means to decide on an investment amount, and then enter the position over several purchases. This way you will get an average entry price, not the best price, but not the worst price either.
Personally, I have made all of these mistakes. Not just once either! It is human nature to doubt and second guess. It is also almost certain that as soon as you buy a stock the price goes down and as soon as you sell, it will sky rocket. Its sod’s law.
There are many things to know before you expose your money to the stock market but it is not as dangerous as you think. It can seem very volatile at times and on a day to day basis it is. Over the long term however, markets go up. Period.
Look at the chart, choose carefully, invest and forget it. Its much easier if you avoid watching the day to day activity.
Check out the webinar next week if you’d like to know how to invest without the stress!!