Investing in the stock market is a chancy business, even for the most experienced Wall Street gurus. Despite the availability of thousands of books and formulas, the jumps and dips of prices still take investors by surprise on a daily basis. This doesn’t mean, however, that you should give up on strategy and just buy stocks randomly; indeed, by avoiding the most common investing mistakes, your investments can be nearly as profitable as those of financial professionals. Here are the five strategic errors that all investors need to keep in mind:
1. Falling in Love
With a company, that is. If you’re excited about a particular company’s business model, and you’re absolutely certain that its product will transform the marketplace, that’s great — as long as you remember your priorities. Blind loyalty is the job of the company’s founders, not the stockholders. If you see changes in the fundamental aspects of your favorite business, and your instincts warn you that these changes spell trouble, it’s not disloyal to jump ship.
2. Getting Greedy
Greed is another emotion that can lead to poor investment decisions. While it’s understandable that you hope your risk will pay off well, the stock market doesn’t function like a casino. You aren’t likely to end up with a huge pile of winnings after entering at a modest level, and if you try to chase this dream you’re likely to end up disappointed. Over the long term, your portfolio will probably stay close to the 10 to 11 percent average returns that are typical for large cap stocks.
3. Putting All Your Eggs in the Same Basket
In an investment context, this warning means that you should diversify. Talk to a broker or look over a review of investment sectors, to make sure your portfolio extends across many regions of the economy. Working with a reputable mutual fund company is also an option if you don’t have time to do the research on your own.
Just as you wouldn’t start a building project without some plans drawn up, you shouldn’t jump into investing without a general sense of where you’re headed. Wise investment strategies take your time line into account, as well as the amount of money you’re willing to risk and your long-term financial goals. Some people draw up detailed guidelines for themselves to avoid making impulsive on-the-spot decisions.
5. Being Insecure
It’s great to study investing basics, but avoid relying compulsively on financial media advice. There’s really no magic bullet out there, and no foolproof formula that’s guaranteed to make you a mint. After all, if there were such a thing, the folks who knew about it would keep it to themselves, rather than charging a few dollars for their e-books or seminars.You’ll get the best results just by monitoring your investments and sticking to your plan.
Everyone who invests in stocks is somewhat at the mercy of unpredictable market forces and unexpected fluctuations. By avoiding these five common investment mistakes, however, you’ll give yourself the best possible chance of having a profitable outcome.