Investing in stocks is a wonderful way to create long-term wealth. But it’s not easy, even though the fundamental principles are fairly simple. Nevertheless, it’s important to remember that investing in stocks can be risky if not done properly.
So here are 5 investing mistakes, knowledge of which can help you avoid them when you are investing in stocks:
Investing Mistakes 1 – Investing For Short Term
If you want just one piece of sound stock market investment advice, then it is to avoid investing for the short term. Equity (or stocks) as an asset class is best suited for long-term wealth creation. Historical data suggests that if you invest in the markets for more than five years, it’s easily possible to get average returns of 12-15% annually.
On the contrary, the markets are risky in the short term as several factors are at play. If you invest for the short term and are forced to liquidate your investments, then volatile movements in share prices in the near term can cause heavy losses too.
Investing Mistakes 2 – Banking Too Much On A Few Stocks
This is equivalent to keeping all your eggs in one basket. Another piece of sensible investment advice is to have diversification in your stock portfolio.
Having all your money invested in just 1 or 2 stocks means that one bad news (concerning one of the portfolio companies) can significantly bring down your entire portfolio. But if you invest in (let’s say) 10 stocks, even a 50% fall in the price of one stock will only result in a 5% fall in the overall portfolio.
So even if you are confident about the prospects of a company, do not put all your money in one stock.
Investing Mistake 3 – Following The Crowd
If everyone (i.e. the crowd) were doing the right thing, then everybody investing in stocks would have been rich by now. Isn’t it? But that is not so.
Investors end up buying stocks that everybody else is buying believing if everybody is buying, then it must be right. The result is that since stocks are neither properly researched nor bought at the right price, people end up with losses.
Smart investors always go against the crowd (general perception) to make money in stock markets.
Investing Mistake 4 – Buying On Tips
When you start investing, you will get hundreds of free tips from various sources like friends, TV, and well-wishers.
Sadly, these tips don’t pan out as claimed and generally result in losses for those who enter or exit the stock at the wrong time. Most often, these stock tips are not well researched and not in line with your investment horizon.
So if you are ever tempted to buy a stock based on a hot tip, don’t do so until you have done the research yourself or taken the opinion of unbiased and capable investment advisors who advise after doing proper research and due diligence.
Investing Mistake 5 – Being Emotional When Buying Or Selling
Your emotions can be your biggest enemy when investing in stocks.
There is enough evidence that most of the time, decisions investors make are not based on logic but on emotions. This is a big mistake as it results in people buying when they should be selling (i.e. rising markets) and selling when they should be buying (i.e. falling markets). And this leads to losses.
So be disciplined and rational. Buy and sell based on factors like business fundamentals and valuations and not your emotions.
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