You need a strategy and a trade or investment decision can be evaluated only in the context of that strategy.
….. Aaron C Brown
Well, I couldn’t agree more! You definitely need a powerful strategy before you start trading or investing in the stock market. Because it is said that some common investment mistakes can cost you hefty and so, you must design some great tactics to avoid those common investing blunders.
When we talk about successful investing, it doesn’t mean just selecting the right stocks but there’s a lot of things that one must consider and avoid.
At some time or another, it happens to most of us: You are at some gathering and one of your friends brags about his latest stock market move and then, you think of applying it to yourself for all the next investment decision you make.
Well, don’t! It’s not necessary that something that worked out for your friend might work out for you. However, you must try and experiment but do add something of your own. Understand the idea behind that strategy and then implement it.
In this blog, we are mainly going to discuss a few top common investing mistakes that people make while investing in the stock market. Therefore, we suggest you not skip a single point as it might be the one where you could go wrong. Let’s get started-
Many of us just try to participate in the rat race and are completely unaware of why we are doing this, how to do this, and what would be the consequences. Still, we participate and run.
Investing in the stock market is also the same. Many of us opt to invest but do not understand the working of the stock market and simply start investing. As a result, we face significant losses. Therefore, to ensure you don’t lose, you must avoid some common investing mistakes described below:
Warren Buffett, one of the world’s most successful investors, warns investors, especially beginners, from investing in companies whose business models they can’t understand. Believe me! This is one of the common beginner investing mistakes.
The best way to avoid this blunder is to create a diversified portfolio of ETFs (Exchange Traded Funds) or mutual funds. In case you do invest in individual stocks, you must ensure that you understand each stock/company thoroughly before you invest.
We can call it one of the worst investing mistakes- lack of patience. Anybody willing to yield greater returns, in the long run, must follow a slow and steady approach to portfolio growth. Instead, investors often rush and expect their portfolio to do some wonders instantly.
In short, you must keep a realistic expectation about the timeline for portfolio growth as well as returns.
When you are in business or into investing, the advice is to get emotionally attached to any company. Also, try not to neglect the obvious red flags that indicate the company’s weaknesses. Keep a keen eye on the changing fundamentals of the company. Further, ensure that the fundamentals of the company are not being compromised. So, how will you know if the fundamentals are altering?
Technically, you can look out for if the non-performing assets are going up, or if there is any sustained under-performance quarter-on-quarter, or if any senior leader has made an abrupt exit, etc.
In case you can’t decide on your own, we suggest you consult an expert or professional advisory. Monitor the organizational factors of the company and don’t chase returns.
For checking fundamentals of the company, you must know-
Professional investors have the potential to make an extraordinary return over a benchmark by investing in a certain concentrated position. On the other hand, a common investor should avoid trying this. It’s more tactful to adhere to the principle of diversification.
While creating a mutual fund or Exchange Traded Fund (ETF) portfolio, it’s crucial to allocate exposure to all major spaces. Do include all major sectors while you create an individual stock portfolio. According to the general rule of thumb, you must not allocate more than 5% to 10% to any one investment.
If you are an individual investor, don’t fall for too much investment turnover- because the transaction costs can eat you alive. You will be caught in the short-term tax rates and miss out on the long-term gains of other sensible investments. Therefore, unless you are an institutional investor having the benefit of low commission rates, you should stay from turnover, or jumping in and out of positions.
Blogs you might be interested in reading:
Another popular mistake in stock trading or investing is attempting to time the market. It’s quite daring to time the market, and even experienced investors often lose at doing it correctly.
Some studies have shown that around 94% of the portfolio’s returns result from the right asset allocation, not from individual stock selection or market timing.
The notion is to find a way that can sanctify your risk tolerance, goals, and resources. It serves in remembering that one size doesn’t fit all. It would be inexplicit to follow an investment strategy that doesn’t suit your investment objectives. So, whatever you are investment tactics would be to ensure that it complements your personal investment goals.
Often, investors make a common mistake of concentrating totally on picking individual stocks. However, various studies have suggested that asset allocation is the key to a successful investment portfolio. Therefore, instead of focusing on choosing just the stocks, try doing proper asset allocation first.
Learn about Asset Turnover Ratio in detail.
One must know that past performances are often not accurate indicators of future results. However, many investors make the common mistakes of relying on historical returns.
If you are a long term investor, you shouldn’t attempt to predict the market as it isn’t practical. Your motto should be to create a portfolio having a long-term investment horizon. Moreover, the historical outcomes should serve only as risk indicators for an asset.
Obviously, diversification is a great tool when it comes to risk management. It renders value when assets have various risk profiles and have low correlation. On the other hand, over diversifying portfolios could be a great mistake. For example, suppose you already have a diversified stock portfolio and to over diversify it, you add equity ETFs to it. It will make no sense at all.