Wall Street’s bull run the last couple of years has sent stocks soaring, enticing many first-time investors to take the leap into the equities world. I support this trend but there are some first-time common investing mistakes that new investors should avoid. The cardinal rule to investing sounds simple: Buy low, sell high. But that’s easier said than done.
So before first-timers take their leap into the markets, here are some of the most common investing mistakes and how to avoid them:
1. Unrealistic expectations
Recent headlines are screaming about Wall Street’s record rally, but consumers tend to have short-term memories and forget that pullbacks are part of a normal cycle. The panicked investor makes the common investing mistake of selling too early. These pullbacks can be your friend if you understand how to recognize them. This is not difficult to do (even for new investors). It takes about 20 minutes a day to do the analysis on the typical portfolio. You should spend that 20 minutes of time 3 times a week - Tuesday/Thursday and once on the weekend. I show you how to do this very easy analysis in my book, The Confident Investor.
2. Short-term thinking
While your investment in any given stock needs to be thought of as a short-term activity, you need to be working towards a long-term goal. Too many investors make the common investing mistake of choosing a couple stocks, buy at the wrong time, and then panic on a 5-7% price decrease.
3. Picking the wrong advisor
Plenty of experts (including me) agree that you don’t need an advisor. But if you do seek professional help, it’s important to ask for referrals and look beyond appearance. Wall Street and big banks force their employees to wear fancy suits and put them in big shiny offices, but appearance is not reality.
Rather than a financial advisor, you would be better off reading my comments on this site, reading Jim Cramer, and reading Mike Ramsey. You should make sure that you have a tax advisor to make sure that your IRA, 401K, and 529 strategy is appropriately set. Just don’t let that tax advisor give you advice on specific investments.
4. Failure to diversify
Asset allocation is the key to long-term success to conserve your principal. I publish a list of stocks on my Watch List that are excellent. You should split your stock portfolio into at least 10 and probably 15 of those stocks. The stocks in your portfolio should be 60-80% of your total portfolio. The balance (20-40%) should be in 4 index funds. Those index funds should be:
- international funds
- bonds funds
- mall-cap or mid-cap funds
- large-cap funds
I have discussed setting up a balanced portfolio before. Read that article and it will give you some great suggestions.
5. Stalking your investments
It can be hard to ignore the blaring headlines and experts on TV, but trading on every news report and professional tip can be detrimental to your strategy. If you use the system in my book, The Confident Investor, you can ignore all of the news that affects stocks (it really doesn’t affect the stock, by the way, as I discuss in this article) and tune into the sports or food channel instead. Don't make the common investing mistake that you need to live and breathe the stock market if you have a stock portfolio. You can still lead a normal life!
6. Not determining your risk tolerance
Investing in the stock market is always a gamble, but it’s important to identify your risk level. Even using the system in my book, The Confident Investor, you have the potential to lose money - especially in any given short term span. If you cannot stand the idea of ever losing a dime on any day, you need to learn to adjust your perspective.
7. Forgetting your role
You are investing in the company, you are not dating the CEO. You should leave the company if you do not like the return you are getting. There are other fish in the sea and other stocks to buy.
Before buying any stocks, do your homework and determine its worth. I show you exactly how to do this in my book, The Confident Investor. Don't make the common investing mistake of paying too much for a stock. In fact, my book actually shows how to determine if the stock is a bargain.
9. Waiting too long
When it comes to investing, time is your friend. The value of compounding is your best friend. If you don’t believe me, check out this article.
10. Listening to your friend is the most common investing mistake
The biggest and most common investing mistake that I see new investors make is to listen to the "hot" stock tip of their buddies. While these can sometimes work out for you, never buy a stock just because a friend suggests it. You should do a full analysis of the company using the tools in my book, The Confident Investor, before you invest your hard-earned money. I speak about this problem in much more detail in this article.
My book, The Confident Investor, will help you avoid most of these common investing mistakes. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.
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