Investing in the stock market is not a walk in the park–far from it, in fact. While a lot of brokers and seasoned investors make it look easy, investing actually takes a lot of time, dedication, and patience. Moreover, there are no shortcuts to becoming a good investor; you have to put in the time to learn it.
For some, learning how to invest is a trial and error process. But if you want to make your first few months investing as error-free as possible, here are common rookie mistakes that you need to avoid.
1. Doing everything yourself when you know you can’t
Especially as a first-time investor, seeking guidance is an excellent way to minimize mistakes. Refrain from doing everything yourself when you know you don’t have enough knowledge or skills to do so. That said, find a broker or advisor that can work with you. Experienced ECN brokers are always a good option. But depending on the type of investments you want to pursue, find someone who has the experience, skill, and knowledge to provide you with great advice.
2. Playing into personal bias
Many beginner investors tend to buy stocks only from companies that they know, like or are endorsed by their favorite celebrities. While some of these companies might be good options, not all of them will be. Moreover, starting out with this type of investing style is not a good way to get into investing or trading in equity.
It may be difficult to get rid of personal bias at first, but it is definitely doable. To avoid this potentially costly mistake, base your decisions on your research about the company, particularly their financial information. As you grow and develop as an investor, making a habit out of research-based investing will help take you farther.
3. Focusing on past performance
Avoid investing in a company just because they have great past performance. Even if they have done well historically, there is no guarantee that they will have the same level of performance in the future. There are too many variables at play that can affect the market, and the COVID-19 pandemic has proved that well enough.
However, past performance is still helpful in analyzing an investment if you’re considering the long-term. For instance, a stock that has had average annual returns of 10% for the past 30 years may have more potential than a stock that has grown 15% but only in the past year.
4. Having the ‘get rich quickly’ mindset
While investing in the stock market may be a great way to grow wealth, success is not guaranteed. Every investment carries a certain level of risk. And again, you need to put in the time to build your skills and knowledge about investing and the stock market in general.
That said, the ‘get rich quickly’ mindset is not a healthy one to have. Instead of focusing on the short-term, create long-term plans and stretch your vision far into the future. Doing so will help you avoid making rash decisions, which may further delay your success. If you are just starting out, plan to have at least a few investments that you will hold in your portfolio for a minimum of 5 to 10 years; long-term investments could maximize your returns significantly.
5. Putting all your eggs into one basket
Lack of diversification is another common mistake that many first-time investors make. Without a proper balance of risk in your portfolio, you could be raising your risk unnecessarily high. Moreover, there is a good chance that your capital will be lost entirely if all of your investments are very risky.
Avoid this mistake by diversifying your portfolio with long-term and short-term investments, as well as high-risk and low-risk investments. Aside from reducing the risk of your entire portfolio, diversification might also help you earn higher average returns.
6. Failure to read your account statements
Depending on the investing platform you use or broker you work with, you should receive your account statements in the mail or online. Take the time to look through them and check that investments, fees, commissions, and other details are correct. At the same time, review how much your investments have gained or lost so far.
Call your representative if there are discrepancies in your statements or if anything seems incorrect or unclear.
By being aware of these mistakes and knowing how to avoid them, you can prevent a lot of hiccups in your first few months or years investing in the stock market. Better yet, you will be more able to make the best decision for your portfolio and increase your average returns significantly.