Engaging with the stock market often brings a combination of anxiety and excitement to new investors. There are several factors to consider when navigating the seemingly endless list of public companies with stocks for people to purchase for trading or investing, and it can quickly become overwhelming. As a result, many beginners struggle to find their footing in the stock market due to the challenging nature of balancing financial knowledge, adequate research, and learning from the missteps they make along the way.
If you’re a first-time investor, you’ll want to be mindful of 5 common investing mistakes beginners often make so you can avoid them and develop a well-performing portfolio that will pay off over time.
1. Not Planning Ahead
An actionable plan is critical to being a successful investor. This means having an end goal you can realize through an effective strategy based on data and research. However, new investors often take a less structured approach, which usually results in losses or unpredictable performance. This lack of planning is detrimental to your portfolio’s overall success and can make investing a frustrating experience.
Regardless of your educational background, it pays to know certain strategies and principles so you can participate in the stock market with relevant knowledge. Research methods online from reliable sources and consider reading books written by experienced traders and investors to familiarize yourself with accounting fundamentals. This will give you a head start and direction so that even if you hit a snag, you’ll have an alternate path to recuperate any potential losses.
2. Letting Personal Bias Get in the Way
People naturally gravitate toward brand names they like, whether purchasing products, services, or trading stocks. If a brand is performing well, it becomes even easier to buy into the image of success. However, having a strong personal bias toward a company and letting that dictate your financial decisions is one of the most common investing mistakes new investors make.
Emotional investing is a surefire way to tank your returns and makes the process more difficult than it should be. Newer investors might follow trending stocks or those recommended by friends or colleagues with little to no financial experience. Instead of making decisions based on a gut feeling, following what other everyday people might suggest, or succumbing to sentimentality toward a brand, treat it like any other investment by researching the company and learning its business model.
Investing should be an opportunity to make money over time, and purchasing company stocks without understanding them is often a losing strategy.
3. Holding On to Bad Investments
One of the most common investing traps beginners fall into is the refusal to cap losses. This happens when an investor refuses to let go of their stocks or assets in a company whose market performance is either slumping or stagnating. The hope is that these stocks are simply experiencing a temporary decline, which will revert and bring back capital gains. This is a risky approach that rarely pans out well, particularly for new investors who are less familiar with how the stock market works.
Many firms and online trading platforms offer a feature allowing you to sell stocks when they reach a certain point. Taking advantage of this lets you mitigate your losses and avoid slipping into a pattern of waiting for a losing asset to even out or return to its purchase price.
4. Keeping a Short-Term Focus
Whether you’re looking to invest or actively trade, participating in the stock market for the first time can be an exhilarating experience. That excitement usually gets the better of inexperienced investors, prompting the desire to make significant gains in as little time as possible. What usually follows is a series of rash decisions in a futile attempt to generate quick profits. Inevitably, the investor suffers setbacks and losses, which can affect morale and long-term performance.
While short-term goals are an important part of investing, the most effective strategy is one that utilizes short-term and long-term goals. Keeping up with the market while practicing patience will allow your stocks to grow over time and produce better results than trying to time the market or make quick gains.
Another important consideration is how volatile the stock market can be with regard to annual returns. In 2021, the S&P 500 returned a positive return of 28.71% but in 2022, was down -18.11%, however, the annualized return over the lifetime is 7.91%(Ycharts) Furthermore, the majority of returns you’ll see from investments will be thanks to the choices you make with your asset allocations.
5. Avoiding Portfolio Diversification
First-time investors have an unfortunate tendency to stick with one or two asset classes for their stock portfolio, meaning they have inadequate diversification. Although some traders and investors can experience success by focusing their attention on a few key positions, this is a fairly uncommon scenario. These individuals generally have years of experience and education to rely on and guide them through specialized strategies.
If you’re new to investing, then establishing a varied portfolio that balances risky and stable assets is a more practical tactic. You can achieve this by utilizing mutual funds or ETFs (exchange-traded funds) and limiting your allocations to 5-10% per investment so you can ensure sector diversification.
Plan, Invest, and Live With Momentum Private Wealth Management
Finding the right path for your stock market investments can be a confusing and intimidating process, especially if you’re a first-timer with no financial education. Instead of making the same mistakes common to most greenhorn investors, you can work with a qualified advisory firm and avoid unwanted setbacks.
At Momentum Private Wealth Management, we help you make the most of your investments. Our professional advisors can create a specialized financial plan for you that generates wealth and sets you up for the future. We operate as a fee-only establishment with transparent pricing and no commission-based structure.
Give us a call at (512) 416-8085 to learn how we can help take your wealth management to the next level today!
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Source: Ycharts