Investing in the stock market can be an excellent way to grow your wealth, save for your retirement, and build a more comfortable future for your children. However, while it is a perfectly viable way to make a lot of money, there is no guarantee you will do so. In fact, for new investors, the act of speculating on the stock exchange can be fraught with pitfalls.
Without the right strategies and knowledge, it’s easy to fall into common traps that can hinder your success. This is why you should never invest more than you are prepared to lose.
That said, that shouldn’t put you off from dabbling in shares. So, to better help you achieve prosperity, here are five general mistakes you should avoid when investing.
1. Jumping into investing without a plan
One of the most common errors beginners make is to invest some money without a clear strategy. For instance, they might buy shares based on a hot tip from a friend or a social media influencer about the BHP stock price without doing any research of their own.
Unfortunately, this impulsive approach often leads to poor decisions being made and financial losses incurred.
The best way to avoid this is to set clear goals before spending any money. Are you saving for retirement, attempting to build wealth, or working toward a shorter-term goal like buying a house?
Once you have understood your end goal, you will be able to formulate an investment strategy based on the goal. This avoids haphazardly speculating without rhyme or reason.
When determining your plan, you should also ascertain how much risk you’re comfortable with taking. Investing in stocks may lead to high returns but can be extremely volatile. On the other hand, bonds tend to be more stable but offer lower returns.
2. Not diversifying
Putting all your money into a single stock or asset class is a schoolboy error that many new investors are guilty of doing. While it may feel tempting to “go all in” on a well-performing stock or sector, this strategy exposes you to unnecessary risk due to the unpredictable nature of the stock market.
A much wiser strategy is to spread your investments across various asset classes, such as stocks, bonds, ETFs, and real estate, as well as several industries, to reduce your overall risk. Doing this enables you, for instance, to better absorb short-term losses from downturns in the tech sector if your investments in healthcare or oil and gas are performing well.
It is also worth diversifying your investments beyond your home country just in case it experiences challenging market forces.
3. Focusing too much on short-term gains
In very rare cases, investing heavily in the stock market can be a great way to “get rich quick”. However, for the majority of new investors, this short-term mindset often leads to unnecessary trading, higher fees, and poor timing.
In general, wealth-building through investing is a marathon, not a sprint. Because, while markets can be volatile in the short term, they tend to trend significantly upward over a period of decades.
A great perspective to have is to maximise your returns by letting compound interest work its magic over time. Additionally, avoid overtrading because the frequent buying and selling of shares can erode your returns due to transactional costs and taxes.
As a general rule, the most successful new investors are the ones who commit to holding onto their investments for the long haul. They also don’t panic during downturns or chase gains during booms.
4. Not doing enough research and learning
Some new investors make decisions based on hype, hearsay, or gut feelings rather than conducting proper research. It is this lack of due diligence that often results in them making poor choices and missing opportunities.
If you are new to investing in stocks and shares, you should try and learn as much about it as possible by reading books, listening to podcasts, and referring to reputable financial websites and blogs.
Before you invest, you should always look into a company’s financial health, performance over the last 1-5 years. Look at its position within its industry position, and its growth potential before deciding to purchase its stock.
Overall, the more informed you are, the better equipped you’ll be to make sound investment decisions.
5. Letting emotions drive decisions
Fear, overexcitement, impatience, and greed are some of the biggest obstacles new investors face when trying to play the stock market. This can result in them panic selling during market downturns or buying impulsively during rallies in the pursuit of quick profits.
The best way to avoid this is to stick to your original plan. Your investment strategy should guide your decisions, not your emotions. Ultimately, if you’ve done your research and set realistic goals, you should trust the process.
A proven way to stop yourself from making emotion-driven decisions is to adopt a Dollar-Cost Averaging approach. By investing a fixed amount of money regularly, regardless of market conditions, you avoid the temptation and risks associated with trying to time the market.
You should also consider automating your trades, as doing this can help limit losses and further remove emotional interference.
Additionally, you need to be comfortable with the fact that markets will always experience ups and downs. So, remind yourself, always, of the long-term goal, regardless of what temporary fluctuations are occurring.
Spanning Brisbane, Gold Coast, Sunshine Coast and beyond, Kids on the Coast is an online guide and printed free magazine for parents. With kids events and activities, attractions & things to do with kids, schools and education, school holiday guides, health & wellbeing for families, parenting and lifestyle news. Located on Gold Coast, Sunshine Coast & Brisbane, QLD.
