Becoming a successful investor is not happening overnight. It takes time and effort to achieve the best results. No one is perfect, and everyone must have made some mistakes. But learning from the mistakes of others is the best way to avoid failure. Especially novice investors will find many challenges in starting and undergoing their investment journey. Here are 10 stock investing mistakes investors should avoid, according to experts.
1- Not Understanding the Investment
Warren Buffett, one of the world’s most successful investors, advises against investing in companies whose business models you don’t understand.
Investing is not a shortcut to getting rich. If investors do not understand the basic investing concepts, their investment can be in vain. Especially investing in the stock market with varying volatility and different industry performance. Before investing in individual stocks, make sure you thoroughly understand each company that those stocks represent.
2- Expecting Too Much from Stocks
Even though investing in stocks has the potential to provide a high return, keep in mind that a high return also comes with high risk. Particularly expecting too much from the penny stocks.
Low-priced stocks may appear to be lottery tickets, with a $200 or $1,000 investment potentially turning into a small fortune. However, penny stocks carry a high risk of loss. It is important to have realistic expectations of the performance of the company. Expecting a small and underperformed company to outperform its peers may sound unrealistic.
3- Putting All Your Eggs in One Basket
It is essential to diversify your portfolio. Putting all your money into one investment can damage your entire assets when an adverse event happens. If one of your assets underperforms, it will not necessarily impact your entire investment if you diversify it.
It doesn’t have to be a stock investment. You can diversify your investment across asset classes such as Sukuk, real estate, or mutual funds.
4- Being Emotional and Impatient
Emotion could be the number one killer of investment gains. Fear and greed do indeed influence the market significantly. Your investment decisions should not be controlled by fear or greed. Instead, they should consider the big picture.
Stocks may not achieve the desired gains right away if you are investing for the long term. If a company’s management announces a new strategy, it may take months or years for that strategy to be successful. Many new investors will buy stocks and expect to gain a profit immediately. Stock market returns can vary dramatically in a short period of time, but in the long run, historical returns tend to favor patient investors.
5- Using the Money You Can’t Afford
The most common mistake is for individuals to enter the markets without establishing a solid financial foundation. When you invest money you cannot afford to lose, your emotions and stress levels rise, leading to poor investment decisions.
Before you start investing, your spending must be under your control. Don’t invest your money in the stock market if it is your rent money or emergency savings. Investing the money you can afford to lose will make your investment decision better.
6- Fear of Missing Out
Many people hear about certain stocks only after it has performed well. The mainstream media usually covers the stocks that have doubled or tripled the price and makes it sounds like a hot deal. Many investors could fall into this fear of missing out on the moment of buying hot stocks.
Unfortunately, the media coverage could make the stock reach its peak and become overpriced. Investing in the overpriced stock will mostly underperform the market as the price falls back into its real value.
7- Trying to Be a Market Timing Genius
Attempting to time the market also reduces returns. It is extremely hard to time the market successfully. Even many institutional investors failed to do so. A study by Brinson and the team found that most portfolio returns are determined by the asset allocation decision, not by timing the market. Investors would be better off contributing consistently to their investment portfolio rather than trying to time the market.
8- Buying High and Selling Low
If buying low and selling high is the fundamental of investing, then why do many investors do the opposite? Although the concept sounds simple, it is actually more complex than it seems. Many investment decisions are motivated by fear or greed rather than rational decision-making.
Many investors buy high to maximize the short-term profit instead of achieving long-term goals. Stocks that have rapidly increased in value, particularly those in hot industries with a lot of media exposure, usually attract even more buyers, driving the price even higher.
On the other hand, when the stock falls, most investors want to bail out immediately. They sell their holdings along with the rest of the market. Price and price movement should not be the only considerations in your stock buy or sale decision. Hence, you might miss an opportunity if you only rely on the price.
9- Having Unclear Investing Goals and Risk Tolerance
Once you have a separate savings net in place, make sure you have clear goals before you begin investing. Investing is not merely about making money. People should view money as a tool to achieve their financial goals.
Many investors are preoccupied with the latest investment trend or maximizing their short-term profit rather than designing a portfolio that could help them achieve their long-term investment objectives. Therefore, before you start investing, it is essential to understand your goal and how much risk you can comfortably tolerate.
10- Not Doing Due Diligence
Due diligence in the finance field is performing investigation, audit, and review to confirm the facts before entering into a transaction. An individual investor can use the available public information to do due diligence. Failing to conduct due diligence can be an expensive mistake. Individual investors should exercise proper due diligence when investing in highly speculative and volatile shares like penny stocks. The more due diligence you conduct, the most likely you will be less surprised by any warning signs or potential risks.
The Bottom Line
Investing in a stock market might sound promising as it potentially gives you a higher return than other instruments. However, you must remember that higher returns come with a higher risk. However, mistakes are part of the investing process. Understanding your position, goals, and risk tolerance will help you become a successful investor.
To avoid making the stock investing mistakes mentioned earlier, create a thoughtful, systematic plan and stick to it. Here is some financial advice to help you achieve your financial goals.
Lastly, Don’t forget to align your investment with your faith. Upholding your faith in your investment would bring peace of mind without worrying about earning from unlawful (prohibited) sources. Musaffa has built a halal stock screener to help you align your investment with Islamic values. Feel free to sign up at Musaffa.com