Investing in stocks always involves a degree of risk. In the long term, succeeding in the world of investment is often a matter of identifying that risk, and taking steps to minimise it. For new investors, identifying the common mistakes, and avoiding them, is a great way to improve your chances.
Chasing Short-Term Gains and "Hot" Stocks
When you’re looking to make sensible investments, it’s easy to be distracted by hype around a given stock. This is a particular danger in especially volatile sectors, like tech. A given company might appear particularly promising, which will give it a significant boost in value. However, the long-term value proposition of that company might later be found wanting, which will cause the share price to collapse.
If you fear that you’re going to miss out on a given stock, then it’s worth checking your feelings - and considering the warning delivered by the overhyped stocks of previous years.
Ignoring the Importance of Due Diligence
The better your understanding of the appeal of a given stock, the better you’ll be able to manage risk. Look at financial statements, the structure of the company, and the track record of the talents involved. You might also consider broader market movements and the impact that certain events might have on certain industries.
While it’s impossible to know everything of consequence about a given stock, a little bit of research and an awareness of your blind spots can help you avoid mistakes.
Overlooking Diversification Within Equities
Diversification is a great way to spread risk. If you’ve poured all of your wealth into a certain company, then you’ll be exposed to short-term fluctuations in the fortunes of that company. It’s worth spreading your portfolio not just across many different companies, but across many different industries – or even non-stock asset classes. The right online investment courses might help you to identify exactly how to diversify – but you can often drive down risk by simply investing in multiple products and stocks.
Letting Emotions Drive Investment Decisions
A great deal of investing is done based on instinct. If you get a sense that your peers are rushing towards, or away from, a given investment, it can be tempting to seek the safety of a herd. However, it’s during a stampede that wise investors can make a healthy profit. Think about which stocks are being undervalued by those around you, and keep a cool head during periods of panic.
Failing to Review and Rebalance the Portfolio Regularly
It can be tempting to simply stick with a given balance of stocks, especially if it’s performing reasonably well. But an occasional review, based on an initial projection made in the previous review, can help you to ensure that your portfolio delivers on your expectations.
