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:
Mistake 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 the long-term wealth creation. Historical data suggests that if you invest in markets for more than 5 years, it’s easily possible to get average returns of 12-15% on an annual basis.
On the contrary, the markets are risky in short term as several factors are at play. If you invest for short term and are forced to liquidate your investments, then volatile movements in share prices in near term can cause heavy losses too.
Mistake 2 – Banking Too Much on Few Stocks
This is equivalent of keeping all your eggs in one basket. Another piece of sensible investment advice is to have some degree of diversification in your stock portfolio.
Having all your money invested in just 1 or 2 stock 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 price of one stock will only result in 5% fall in overall portfolio.
So even if you are confident about the prospects of a company, do not put all your money in one stock.
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 thinking that since everybody is buying, it must be right. 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.
Mistake 4 – Buying on Tips
When you start investing, you will get hundreds of free tips from various sources like friends, TV, wellwishers, etc.
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 give stock market investment advice after doing proper research and due diligence.
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 times, decisions made by investors are not based on logic but 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.