You are all ready to join in the exciting world of investing and are as excited as can be. That is a great place to be, but just remember to stop and take a breath before you get started. There are some really awful mistakes that a lot of newer investors make that you definitely want to avoid.
1. Trying To Time The Market
A lot of newer (and some not so new) investors like to think that they can time the market. They believe that they know something the rest of the market does not, and they take a big gamble trying to prove it and make a lot of money. Yet, as the Huffington Post bluntly puts it, no one can time the market perfectly. Everyone out there is trying to get it right, but no one is really good enough to trade in and out of the market profitably on a consistent basis.
2. Investing In Companies You Don’t Understand
A popular hobby in the 1990’s in particular was to take stock tips and trade on them. That is to say that people would hear about a supposedly great stock that was ready to launch into the atmosphere in value. They would put their money to work in said stock only to be disappointed when things really did not work out well for them.
Listening to what someone else believes about a stock and then trading on that information without doing your own research is a fool’s errand. You may get a winner every now and then, but you may as well be playing the lottery at that rate.
3. Not Paying Enough Attention To Fees
Fees and commissions can be a big killer for a lot of stock trading accounts. Many who are new will have relatively small accounts, and this means that any fees or commissions eat even more heavily into their funds as a percentage of the total.
It is easy to not look at the fee structure at all or to assume that it is not that bad. Do not make this mistake! Also, don’t assume that a small percentage difference in fees is nothing to worry about. Every percentage point higher in fees you are paying is less money you get to keep in gains from your investments. If you are not investing for the gains, then what you are you investing for in the first place?
4. Actively Trading/Day Trading
This mistake is similar to trying to time the market. Trading too frequently is a bad idea, even illogical says the New York Times. Here the problem is three-fold. First, a trader making a lot of trades is racking up a lot of commissions for the broker. Those commissions must be overcome before any profit is realized. This means that the trader must be highly profitable just to stay above water on those trades.
The second issue is that the trader is new to the market and probably is not all that familiar with how the market fluctuates around for a variety of reasons. Finally, heavy trading is the same thing as trying to time the market. The trader is guessing that he can predict where the price of a particular investment is going before the rest of the market does. That almost never actually works out.
5. Panicing Over A Market Downturn
The point of investing is to make money, so it is easy to see why some might freak out if they are in fact doing the opposite. A lot of investors panic when they see that the market is headed down. Their fear mechanisms kick in, and they may even start to sell off their shares in order to hold on to whatever money they have left after the decline.
The problem with doing this is that it locks in the lower prices and realizes the losses. More stable investors know that market declines are just part of the overall game. If your investment choices are solid, they will return and even make gains in the future. The best thing to do when the market is down considerably is to buy more if possible.
6. Investing More Than They Can Afford To Lose
The final thing that must be noted is that it is possible to lose money in the market. While the market has a net positive average return for its entire existence, there are years when it goes down. There are also individual investments that go down. Some even go entirely out of business and become worth nothing (think Enron).
Those risks are out there, so investors should not put more money in the market than they can reasonably afford to lose. Always have extra money to live on outside of your investments.