When you are just getting started with investing, like anything else, you have a greater potential to make mistakes. Hopefully, I can help you avoid some of the most common ones that come up. By avoiding these mistakes, you are more likely to make sound, well-thought-out investments and have a greater chance of achieving your investment objectives.
Don’t Let Your Emotions Drive
A very common mistake for new investors, and even sometimes the seasoned ones, is that they let their emotions choose their investments for them. Or, they let their emotions determine what they do with their current investments, i.e. when to sell or buy more. Despite loving what a company stands for or being emotionally connected to it through relationships, your first priority is to examine your investment in the company with an analytical approach. What value have you placed on the company? What events may be impacting the stock? What events might impact the stock in the future? Are you possibly missing something that other investors have keyed in on? Are you making money? Are you possibly just wrong in your opinion as to the value of the company?.
Know What You’re Investing In
One of the biggest mistakes that you can make as an investor, is choosing to invest in something that you know little, or even nothing, about. Not only should you understand your investment, but you should also understand how the company makes money. In other words, you should understand the business model and the key drivers of success as the company strives to achieve its business model. That would entail understanding the key metrics that you can monitor. It is also valuable to understand the industry the company competes in and its primary competitors. By knowing your investment, you will be better positioned to recognise deteriorating trends that might alter your investment opinion or opportunities that have not yet been factored into the stock price that might present a buying opportunity.
It’s a Marathon, Not a Sprint
Like many things in life, investing is rarely an instant success. It takes time and most importantly – patience! Having a mindset that you are going to see huge changes in a short amount of time is a big mistake and could lead you to some serious disappointment and loss of money. The best way to negate this is simply by taking a long-term haul approach to your portfolio, an understanding the importance of time, and a firm grasp on the rationale that drove your investment decision at the onset.
Don’t Put All of Your Eggs in One Basket, or in Too Many Baskets
This mistake takes on the form of a double-edged sword. It is rather easy to say, but you should have neither too many nor too little investments in your portfolio. Diversification is critical, but you can also diversify away your chances to meet your investment objectives. So, how are you possibly to know what the right number of investment positions is? To start, you should make sure that you do not have too many investments to where you, or your advisor, cannot keep track of them. When your investments start to slip through the memory cracks, a red flag should be raised. It is also important that your portfolio isn’t just full of the repeats. On the flip side of that coin, failing to diversify enough could also lead to some big problems. Putting all of your investments into one single asset can be dangerous. When your money is spread across multiple assets, you are more likely to see consistent progress. Many experts have weighed-in on the number of investments needed to have ideal diversification, and most would advise you to not have more than 5% to 10% of your portfolio in any one company.