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We’ve all been there: You’re at a party with your closest friends drinking beer when a guy from the group starts bragging about how investing changed his life and made him a millionaire.
Wait that’s not the catch, It made him a millionaire in 6 months only!
You hear this, get super depressed and wish it was you but get all the energy you have, and jump right into investing.
You buy some stocks, some bonds, some debentures, gold and a lot of other things or maybe you just stick to stocks because your friends said: “P.S. The Gold is in the Stock!” Surely he said that.
But wait, you went too fast too soon. You’ve already made awful mistakes you just wished you could erase. It’s not over yet.
Brace yourselves, here are the 9 investing mistakes made by all but taught by none. If you want to ensure you minimize your risk and at the same time make some profits, give this article a good read.
1. Not Understanding What You Invest in
The most successful investor Warren Buffett has said it time and again and I’m repeating it – Don’t invest in something you don’t understand. Be it a stock, a bond, forex currencies, derivatives whatever it may be, if you understand the market, the company, the currency, go ahead and pour your money into it.
But if you don’t understand it, investing in such instruments will only bring losses along with minimal to no profits. If you don’t understand the business model of a company, don’t buy that company’s stocks.
The easiest way to avoid this problem is to diversify your investment portfolio, meaning instead of buying stocks and bonds straight from a company, invest in instruments like mutual funds. It’s diverse, your risk is lowered and the chances of you not making losses is high.
2. Lack of patience
You’re probably investing your money because you’ve heard that the fastest way to multiply your money is by investing in stocks. That’s so far away from the truth. Yes, you can multiply your money by investing, but fast? Not really.
Tell me this, how many times do you need to realize the fact that the quote – slow and steady wins the race, is real? Be it at the gym, in college, in sports.
Only by constant practice, you will achieve great results. All this requires time, a lot of time. Similarly investing is a long-term game. You can’t hope to buy the stock of a company today and make a profit tomorrow all the time.
Sometimes you can make day-to-day profits but the instances are quite rare. Approximately 80% of people who invest their money in any financial instrument end up losing money instead of making money; that’s a proven fact. Have patience and understand one simple fact about investing – It’s A Long Term Game.
3. Falling in love (with a company)
Have you ever fallen in love? If you have then you know what I’m talking about. You get completely engrossed in that girl/boy and forget all other gold mines around you.
If a stock increases in value, we feel amazing as our choice was good and we forget that we bought the stock for investment, meaning if it performs well, you should think of selling it or forgetting about it (if you’re investing for the long term).
Just because a company is showing steady growth over some time doesn’t mean you only focus on that company. I recommend you have a list of the top 10 companies you like and spend equal amounts of time in all learning about all of them.
4. Not searching for varieties
Do you know what Investing 101 says? It says to not invest in just one company. You need to diversify your investment portfolio. Diversification is the key to success in investing.
Let’s get it straight, you’ve heard this a lot of times, investing is a risky game, one company that is making amazing growth in the last five years can easily become insolvent, which makes your share value Zero! That’s exactly why people who invest in mutual funds show better returns than those who just invest in a particular stock and keep diversification at bay.
So instead of leaning on just one company to make you money, pick up a few stocks from every industry you know of and trust. A few of these companies will make your profits while the others give losses; overall making it a balanced portfolio with normal profits.
5. Investing with your emotions
Did you know the No.1 killer for return on investments is your emotions? You might say that you don’t get affected by small bumps in the market but in reality, you do and it hurts bad! But that doesn’t imply you take action based on your emotions.
When the market is down, all your investments will suddenly be negative and if you sell them now, you’ll surely make losses. Most fall in this trap and sell their investments as they don’t want to see their stocks fall more in value. It’s not their rational mind talking, it’s their emotional side doing all this nasty work.
Understand this fact, the market will give you good returns over a long period. Short-term downfalls don’t affect your overall long-term investment goals. Tell your emotions to take a nap, instead of selling your shares during a recession or when the market crashes, keep them close to you.
6. Trying to time the market
We’ve all been there, seeing the professional day traders on the clock at all times, buying a stock at 11:00 am and selling it at 11:45 am. They try to predict how the market will respond to the news and accordingly act to make profits.
Though it may sound easy, it’s a burden! You can’t time the market, all you can do is make educated guesses to determine how you think the market will perform under a given situation and when will it fall or rise. That’s all it is – a guess.
Answer this, do you fill CNG into a car and guess it won’t get spoiled or it won’t explode? Or you make sure you put the right fuel (eg – petrol) to make it run smoothly?
Similarly, are you willing to pour your money into a stock because you guess it will double in three days? I think you’ve got my point.
7. Too happy with early profits
You just began your investment journey, made some profits and now you think you’re a Pro. Yeah, that happens with almost everyone but don’t let it happen to you. Greed almost every time spoils your strategy. You make a profit buying and selling Stock A, now all you’ll focus on is that stock.
You don’t learn about any other investment instruments as you aren’t keen to learn and just want to make a quick buck. Maybe you’ll tell everyone you know about how much money you made with Stock A and when the value of that stock crashes, you’ll lose everything.
What should you learn from this? Just because you made some profit easily, doesn’t mean you know everything about investing and it doesn’t mean you can’t incur losses.
8. Not being consistent
The excitement of making profits shouldn’t exceed your main goals, which is to make consistent profits through investing. Consistency is the main element that will help you achieve your investment goals. You should invest when the market is bad. You should also invest when the market is good.
Don’t waste your time trying to time the market. It’s a guess and we all know how good we guess in day-to-day situations. If you want profits and you want to grow your investment portfolio, consider investing consistently and see your money grow on its own.
9. Not identifying your risk-taking capacity
If you watch a lot of TVs, especially news channels, you might have come across a mutual funds ad. They say it in small words at the end of their ad – “Mutual funds are subject to market risk. Please read all scheme related documents carefully”
This statement alone means it has risk and these companies promoting you to invest don’t guarantee you risk-free profits they don’t guarantee profits at all. We interpret that anyone who enters the market makes money and losses are not an option. Identify your risk-taking capacity and then invest accordingly.
Have a strategy and stick to it
Mistakes are bound to happen. No one’s an expert in the very beginning. Everyone starts at level zero and walks their way to the top. Developing a strategy towards investing does justice to your goals as you’ll be developing a strategy based on your risk-taking, goals, and time you need to stay invested.
Once you have a strategy in place, slowly put some money and try it out. If it works great, keep pouring in more money. If due to changes in market conditions your strategy fails, no problem. Change it and make a new strategy based on the current market situation.
And if all this seems too heavy for you, meet a financial consultant and let him take care of your investment portfolio.
All this information might seem a lot at first but read it a couple of times and it’ll be easy for you to understand.
Learning How to invest won’t happen in a week or even a month. Start today, learn every day, and practice what you learn to make some real money with your investments!
What according to you are investing mistakes almost everyone makes? Put it down in the comments below.
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