It does not matter how much you know about the stock market; if you do not have the right mindset, you will not be able to succeed on the market. Many beginner investors make the same mistakes, most of which are easy to avoid. These errors can lead to a dismal experience in the market, which can deter many from earning in the process. Here are five mistakes made by rookie investors, and how you can avoid making them.
Mistake #1: Too Emotional
One of the biggest mistakes made by first-time investors is that they become too emotional. If a stock underperforms, they might panic and sell. If a stock outperforms expectations, they become cocky and do not sell.
After some bad experience, an investor might second guess every decision they make when investing in the market.
As an investor, you need to have confidence. If one of your stocks does not perform well, do not put yourself down. Everyone chooses a losing stock. Even billionaire Warren Buffett has made bad decisions on the market during his lifetime.
No matter what, just stay in the game, and you will be rewarded. Do not let one bad experience be a reason why you pulled out of the market and missed an opportunity. Accept a loss, then move on and look for the next best investment to be made.
On the other hand, many early investors might have too much confidence in themselves after some early success.
One of your stocks might have had a really good gain, and you might think you are an expert in the field. Do not be fooled. Prior to the Coronavirus pandemic, the market was in the best shape that it has ever been. Honestly, investors could have invested in practically any publicly traded company during that time and experienced a good return.
Do not confuse an excellent bull market for being an expert in the field. Do not think you are the greatest investor, because you will be too ignorant to recognize when you are wrong.
You need to accept losses at times and know when to pull out of some investments. If you think you cannot be wrong, then you can end up losing money over time. In fact, when a recession does occur, you would be so shell-shocked that you will not know how to react.
How to Avoid
Ultimately, you should trust your decisions. If you have done your homework and research, then there will be no reason for you to worry. However, never be too prideful; the market is unpredictable and will not reward ignorance.
Let’s look at Bank of America ($BAC) for example. In 2009, BAC was worth $4, over a $30 drop in its value from earlier that year. If you had owned the stock and panicked, you might have sold for a tremendous loss. However, if you had remained calm and removed emotion from your investing, you would have not lost on your investment over the long-term. In fact, if you were investing wisely, you would have seen 2009 as an amazing opportunity and bought shares at the low price.
Emotion can ruin an investor, so eliminate it from your tenure with the market to assure your success.
Mistake #2: No Research
Out of all of the mistakes listed, this might be one of the most preventable. Many beginning investors seem to just invest their money without knowing anything about that stock or company.
If you were to buy a car, you would not buy a car just by looking at it. You would most likely do some research. Maybe you would look at the year and model of the car, the mileage, an accident report, and so on. Why would you take such measurements when buying a car but not when investing in stocks?
When investing, you are using your hard-earned money to make financial decisions, like when buying a car. You can be throwing it away, without knowing where it is going.
There is the old saying that a broken clock is right twice a day. In this case, you can get away with this occasionally and blindly pick a good stock. However, this is mostly not the case, as this will usually lead to poor market performances over the long-term.
How to Avoid
Read, Read, Read.
Reading is the key to fully understanding the company, in which you want to invest. Staying up-to-date on current events can prove to be very beneficial in investing. Additionally, there are various documents available to read, such as 10-Ks, balance sheets, income statements, and various calculations that help identify good investments. Read A Beginner’s Guide to the Stock Market for more information about that.
This might seem like a lot, but it is necessary. At the end of the day, this is your money on the line. Like how you would spend days, or possibly weeks, looking for a new car, do your due diligence to research your next possible investment.
Mistake #3: Lack of Patience
Many investors, especially younger ones, go into the market with the idea that they will be able to create a fortune quickly. This mindset sets an investor up for failure.
The real money made in the stock market is made in the long run. Factors, like dividends, long-term gains, and compound interest, allow investors to fully reap the rewards from stocks.
Fortune will not come in one day. Investing is a waiting game. The goal is not to be rich now, but to be rich in your future. We are young now and need less money than we will need in the future. So, take advantage.
How to Avoid
You need to play the long game. When you enter the market, have the mentality that you will not be touching your investment for years. By investing in reliable companies, your portfolio will perform well over the long-term. Long-term trends are easier to predict than short-term. I can say, for a fact, the market will be higher in ten years than now. However, I cannot predict the market as confidently for shorter time intervals, like next week or next month.
By staying in the market longer, you will be less susceptible to losses, as more stocks will even out over time for gains. Just look at Bank of America in the previous example.
Mistake #4: Listening to Others
“Hey, you should invest in this company!” How many times have you heard this?
Friends, family, or ‘experts’ give their recommendation to you, hoping that you listen to them. And you know what? Friends, family, and ‘experts’ can be wrong!
Without doing any research or knowing if the other person did research, new investors take their advice, which leads to losses on the market.
Never make an investment without doing your own research. They can value something in the company, with which you do not agree. Or, they can suggest an overall terrible stock, simply because it is trendy.
How to Avoid
You definitely can listen to others’ suggestions, but, before you do, study it for yourself to see where your money is going. Even if it is an ‘expert’ from television, always do your own research. Other people can be wrong. I would rather be wrong myself than lose money on someone else’s bad recommendation.
If someone else gives you a recommendation, ask what they like about the company. What specifically about the company makes them think it is a good investment? If they answer confidently, you can do research in that area to see if they are correct. If they cannot provide an answer, then you know that they do not know much about the stock or the company.
Mistake #5: Not Reinvesting
This is the one mistake that drives me crazy.
After realizing a massive gain or receiving their dividend payment, investors decide to use that money for material items. What a mistake!
That money should be reinvested into the market. With the money you get from dividends, reinvest it to purchase more shares. This will start adding up over time, especially when you take into account compound interest. Albert Einstein said “compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it”.
Just look at the two images above. If you invested $1,000 with an average return of 8% without reinvesting, you would accumulate around $2,100 over the course of ten years. However, if you were to reinvest $100 per year with the same conditions, you would accumulate $3,700, which is $1,600 more! That is only assuming that you invest a small amount of $100. If you were to invest more, you would easily accumulate a huge position in a company.
In addition, if you realize a massive gain from a sale of a stock, use that money to reinvest into another stock. Or, if the stock that you sold falls in price, buy some shares back at a discount.
Compound interest is remarkable, as it truly is a means to accumulate a massive fortune. It benefits those who continuously add to the principle the most.
How to Avoid
Most brokerage accounts allow you to automatically reinvest your dividends. This is what I use. I am able to accumulate larger positions in my portfolio, while I do nothing. Plus, with compound interest, these small dividend payments will grow to be much larger down the line.
Honestly, I never withdraw money from my investment account. I advise that you do the same. Once you put money into your brokerage account, act as if that money can not be used for anything but investing.
Have you made any of these mistakes? Let me know in the comments below!
- What in the World are NFTs? - September 12, 2021
- Schools Don’t Teach Financial Literacy, and Americans are Paying the Price - September 2, 2021
- How to Make an Emergency Fund - May 20, 2021