Investment is gained quite popularity in the past few decades. Many people have made investments a daily part of their lives while others main source of earning has become from trading. It’s because investment provides many perks and benefits and is quite different from generic income modes. One of the major advantages of investing is the ease of entrance for newbies. By decreasing the initial investment barrier, many new novice investors have started to enter the market. Although, it is a good practice to be engaged in, however, the very same advantage has led to the list of worst investing mistakes that one can make while investing.
This is because newbies rarely understand the complexity involved with investing. The ease of entrance has helped them to enter, but now the real challenge is to harness the knowledge required for investing. Their ease has led to their carelessness that results in many basic and higher level of investing mistakes. Therefore, it’s quite essential for us to identify these problems along with recommendations on how to solve them. To make it easier we have divided the common investing mistakes into two types.
General Investing Mistakes
When we talk about general investing mistakes, we focus on issues other than the investor themselves. These include issues that have a fault in strategy and tactics rather than on a personal level. Normally these issues happen with beginner investments and can be avoided in the future. However, that is only true if the investor realizes his mistakes and begins working on them. If, however, he chooses not to, then these problems can keep causing harm and losses for you. Hence, the sooner you identify these issues, the better it is for you.
The following issues have been identified as general investing mistakes that novices should try to avoid.
This is one of the most common investing mistake that novices make in their beginner investments. The issue highlighted in this type of investment is the same as discussed above. The reason why many new investors fail is because they lack in accurate planning before entering in the market. Since, it is quite easier to enter, they start to believe that it’s also easier to operate in investment. However, that is by far the greatest, and worst assessment that they could’ve made.
Before investing, it is quite important for you to have an investment plan. What you can do is decide upon your beginner investment amount. Next, you should also decide what kind of portfolios you are going to be investing in. Lastly, an important factor of consideration should be your goal for investment. Here, you should decide exactly what do you plan on getting from the investment. This matters a lot as goals dictate the direction of your investment. For example, if you want to attain a short term goal, say buy a car from investment revenues, you should go for the riskier investments. This is because, even though these investments can be risky, they do have the capacity to generate revenues in the short term. On the other hand, if your goal is far stretched, such as retirement plan, then you should consider investing in securities that have more security and lesser risk. In the market, these type of securities are known as blue chips. So, by following these few simple steps, you can have a basic level of Investment Plans. However, if you plan on succeeding, you should consider making full fledge investment plans that experts use to become successful.
Investing in Only One Type
The next type of investing mistake one can make is by making investment without considering the various categories. Ever heard of the saying “Don’t put all your eggs in one basket”. This philosophy applies directly in the case of investing. The problem is that novice investors are only aware of certain types of investment categories. They normally invest in modes they are familiar with. Diversifying your investment is, hence, quite essential so that if a loss occurs, in one category not all your investments are lost.
To counter this situation, novice should consider diversifying their portfolio by investing in different modes. The pro tip here is to make you beginner investment in opposite modes. So that the loss in one category is adjusted by the profit in the other making the net effect of zero. For example, you can consider investing in an international company A that depends on imports and buy the currency of that particular country. If, due to any factor, there is a devaluation of your country’s currency, it might lead to a loss in your investment in the company A. However, at the same time, the increase in the foreign exchange will keep you from incurring a major loss. So, in this way you can keep your losses at minimum and your profits high.
Performance not Demand
Another common investing mistake made by many novice investors is the habit of following wherever the herd goes. An important lesson to investors is to not be led by the demand. When a share has produced increasing returns for, say, 5 years now, it means that five years ago was the right time to invest in that share. Now that time is gone and the share is only going to decrease in price.
To avoid this investing mistake, you should focus more on the performance of the organization rather the demand of its shares. As you stay in this game, you learn more about the different measures that we take to assess the performance of its shares. That is the true way to judge where the organization is going and whether or not, you as an investor, should make your investment in that company or not.
Concept of Decreasing Returns
Many people are unaware of the concept of decreasing returns. The concept is that those stocks that were doing well in the past are going to do bad in the future. The opposite case is also true, which states that those stocks that are doing bad currently are going to perform good in the future. This does not mean, however, that you start investing in all the stocks that are currently traded at a lower cost. The reason is simply based on the market demand of that security.
Hence, for novice investors, it is important for them to equip themselves of these kind of theories that explain how stocks behave. When investors do so, they are better able to make investments based on knowledge and not just instinct.
Not Accepting Losses
Another common investing mistake that new investors face is their inability to face losses. When you become part of investments, it is not always possible for you to make good decisions. Sometimes, you are bound to make bad investment decisions that may lead to losses. Sometimes, these losses can even be quite high and lead to demotivation among investors. Sometimes, this demotivation can lead you to either become risk averted or completely give up on investment. However, this is the time for you to show patience.
Investors should take these losses as a lesson to learn from and move on. They should acknowledge that investment is the kind of business where there are many losses. It is just important for you to believe that these losses are temporary and you can still cover these as a small price for bigger returns. So, if your beginner investment has turned out as a failure, it’s not something to worry too much about.
Misleading Market Signals
Investment is often demand driven rather than on actual facts. This is because the market is continuously flooded with information that causes a boom or bust of the stock market. While some factors are true, many misleading factors are specially designed for novice investors to be taken advantage of. While smart investors quickly ignore these signals, novice investors increase the demand for those shares driving its price up. Although, the returns become high it is only temporary and are quickly restored to their original prices. Then the winner of such a trade is only the person who starts selling his shares while the demand was still high. This area is mostly dominated by smart investors as they knew of the opportunity they had.
Hence, the lesson here is to ignore the misleading signals, while having a close watch on the windows of opportunities. Only then will we be able to really benefit from the volatility in the market demand.
One more disadvantage of an easier entry is that people no longer consider the importance of research. Had there been a bigger investment amount, newbies would have considered on conducting thorough research before making huge investments. Since, this kind of barrier does not exist investors are free to enter the market without and prior knowledge. Although, in some cases it is good that newbies are being provided with the opportunity to explore various options. However, the problem arises when newbies keep on going with their instincts instead of using research.
It is quite understandable that being new to all this, it might be quite hard for you to research. So, for starters, you can only start by updating your knowledge regarding the financial modes you’ll be investing in. As the time goes by, you should start upgrading your knowledge regarding the fields you are invested in and other fields as well. As you gain more and more experience, a time will come when you will be able to use your knowledge on command along with your practical skills.
Relying too much on Research
While research is a good thing for you to engage in, it sometimes better to let go too. The reason this is so is that sometimes research itself becomes an investment, and mostly it’s not a good one. When you research a lot in a particular field, you begin to get attached to that field even if it’s not being productive. So, it becomes quite difficult for you to switch to other modes as, to you, they are highly risky with potential losses. Another issue is that many new investors rely on information from different financial channels and magazines. These institutes are often filled by misleading signals only to divert your attention to less valuable stocks.
To new investors, we suggest to avoid this common investing mistake by taking basic knowledge of all modes. As you find different modes successful start researching about them too. However, keeping up to date only for one type of research is not advisable. As for the misleading signals, it is best to refrain from investment news and magazines and focus more on reading financial reports of businesses you’re involved in.
Random Walk Hypothesis
This is another important theory that all new investors should be aware of. The random walk hypothesis claims that all the past data trend is misleading and not accurate as the market never has a fixed growth rate. As the market change, technology evolves so does the organization. Hence, since we can never track future, we can say that securities face a random phenomenon of increase or decrease that is not market demand’s dependent.
The implication of this theory is to pay less to no attention on websites providing past trend data with future predictions as they cannot be trusted. The only thing that can be trusted is your research. Hence, it is best if you rely more on your research while planning on your investment plan instead of listening to future predictors as they are entirely based on luck.
Behavioral Investing Mistakes
Next are the common investing mistakes caused by the behavior problems. These issues are more personal and a little more difficult to remove.
To deal with these kind of issues, you need to start training your mind along with acquiring different skills. Behavioral mistakes are most common in novices as they are still new to this game. However, it is up to the novices whether or not they want to remove these behavioral biases. If these biases are left unchecked, then the result is permanent development of habit that will keep you down. Although there are behavioral investing mistakes that novices make, a few major one are highlighted below.
Risk Taking behavior
The first one is the inability of investors to stabilize their risk. New investors often keep on taking risk without realizing when to stop. This risk taking behavior is often because of their greed to make higher returns as the more risk you take the more is the price. However, novices often forget that higher risk also means higher chances of incurring loss. The opposite scenario is also true in which novices begin on taking too low risk and hence a lower revenue.
The trick is to develop a portfolio and take just the right amount of risk. This factor is covered in the planning phase of investment by experts and often missed out by novices. However, if you want to stay in the investment business then you need to know exactly how much risk you should take on. Luckily, there are many systems and soft wares that build you your investment plan. It is, then up to you, whether or not to follow that plan.
Hindsight bias is when investors try to predict the future events based on the past. This is a grave mistake that they make as we have already discussed how securities follow a random walk.
The problem becomes even more bigger when novices start to take on more risk based on their absurd implications. Since, in reality, there is no pattern on how securities go, hindsight bias can become a deadly habit to be addicted of.
The only way to remove this bias is to realize there are no hidden patterns in anything. As we have once discussed before, if a stock is doing well then we should have invested in it before. Now, however, is not the time to invest in it as the only profit left in it is minimal while the chances to incur a loss is greater. Try focusing more on building and sticking to an investment plan instead wasting your time and money on wasteful knowledge and you’ll be able to do just fine.
Thinking Short term
Although there is nothing wrong with having short term goals fulfilled by investment, some securities take time before turning out the real profits. The problem arises when after a few minimal losses novices begin to pull out their money as they become dishearten.
Even if it is not about investing in short term or long term securities, the problem with novices is their urgency to make profits. This urgency then explains their risk taking behavior that ultimately leads to their loss.
The method to overcome this behavioral investment mistake is again by sticking to your investment plan. If you have a clear and coherent investment plan that you follow like faith, only then will you be able to let go of this temptation and begin smart investing.
Confidence but no Research
Overconfidence is another common trait among the novices. Although some level of confidence in yourself is good as it helps taking bold decisions. However, overconfidence can often make you miss out on a rationale decision against just a bold one. It starts at a very basic level in novices and slowly develops into a deadly trait.
What happens is that novices tend to assign both positive and negative events related to finance as something they already knew. This increases their confidence and they start to believe that somehow they can see things in the stock market others can’t.
A second type of example is how some success in investments makes novices believe they are now professional investors. Hence, they start takin more risk and before they know it, they are back to zero again.
To overcome this bias, you should realize how the trend in securities work and how one success doesn’t necessarily assure the other. It is important in investment business to always keep your eyes and ears open and have, at least, some doubt over your calculations. Only then will you keep on updating your knowledge, your investment plan and finally your investment career.
Hence these are a few investment mistakes that you should always avoid through the methods we have discussed above. One important tool that we have highlighted in our discussion is making investment plans. Therefore, it is important for you to learn more about how to make investment plans to become more successful.
Other steps on tackling both general and behavioral related common investing mistakes have also been discussed. Once you begin to follow these steps religiously, you will see how you can reap out the true benefits of investments and rise above the common novices in the investment Business.