Did you miss out on part 1?
Taking the Lead of Others
Another typical error that inexperienced traders make is that they mindlessly follow the crowd.
As a result, they may wind up paying too much for hot stocks or may open short positions in securities that have already dropped and may be on the point of turning around.
Both of these outcomes are undesirable. In spite of the fact that experienced traders adhere to the maxim that the trend is your friend, they are used to getting out of transactions when they have an excessive amount of competition.
It is possible for new traders to remain in a trade for a considerable amount of time after the smart money has left the deal.
In addition, novice traders may not have the self-assurance to adopt a contrarian stance when it is necessary to do so.
Maintaining a Single Basket for All of Your Eggs
The practice of diversification is a method for avoiding excessive exposure to any one investment.
If one of your assets incurs a loss, you will be protected by having a portfolio that is comprised of many investments.
In addition to this, it helps guard against the significant price changes and volatility that might occur in any one investment.
Additionally, while one asset class is doing poorly, it is possible that another asset class is performing really well.
Numerous studies have shown that the majority of managers and mutual funds perform below their respective benchmarks.
Over the course of a lengthy period of time, low-cost index funds often perform better than 65? 75 percent of actively managed funds or to the top second quartile of the distribution.
The urge to invest with active managers continues to be strong, despite the fact that there is a significant body of research supporting indexing.
The reason for this, according to John Bogle, the creator of Vanguard, is that “Hope springs eternal.
Indexing is kind of boring. It goes in the face of the American spirit [that] “I can do better.”
Index all or a significant portion (between 70 and 80 percent) of your traditional asset classes.
If you can’t resist the excitement of pursuing the next great performer, then set aside approximately 20 to 30 percent of each asset class to allocate to active managers.
This may satisfy your desire to pursue outperformance without causing your portfolio to suffer irreparable damage.
Your Homework Is Being Shirked
New traders are often guilty of not doing their homework or not conducting adequate research, or due diligence, before initiating a trade.
Doing homework is critical because beginning traders do not have the knowledge of seasonal trends, or the timing of data releases, and trading patterns that experienced traders possess.
For a new trader, the urgency to make a trade often overwhelms the need for undertaking some research, but this may ultimately result in an expensive lesson.
It is a mistake not to research an investment that interests you. Research helps you understand a financial instrument and know what you are getting into.
If you are investing in a stock, for instance, research the company and its business plans. Do not act on the premise that markets are efficient and you can?t make money by identifying good investments.
While this is not an easy task, and every other investor has access to the same information as you do, it is possible to identify good investments by doing the research.
Investing in Unfounded Advice
Everyone probably makes this mistake at one point or another in their investing career.
You may hear your relatives or friends talking about a stock that they heard will get bought out, have killer earnings or soon release a groundbreaking new product.
Even if these things are true, they do not necessarily mean that the stock is “the next big thing” and that you should rush into your online brokerage account to place a buy order.
It is important to keep in mind that purchasing on media tips is frequently founded on nothing more than a speculative gamble.
Other unfounded tips come from investment professionals who are broadcast on television and social media.
These professionals frequently promote a particular stock as though it is an absolute necessity to purchase, but in reality, it is nothing more than the flavor of the day. These stock tips frequently fail to materialize and go down after you purchase them.
If you find a stock tip that really catches your attention, the first thing you should do is think about the source.
The next thing you should do is do your own research so that you are aware of what you are purchasing and why you are purchasing it.
For instance, purchasing a technology stock that has some proprietary technology should be based on whether or not it is the right investment for you, and not solely on what a mutual fund manager said in an interview with the media.
The next time you are tempted to purchase based on a hot tip, you should refrain from doing so until you have all of the data and are sure that you are comfortable with the firm.
Ideally, you should get a second opinion from other investors or from financial experts who are not prejudiced.
Excessive Viewing of Financial Television
Almost nothing on financial news programs can assist you in accomplishing your objectives, and there are very few newsletters that can provide you anything of value.
Even if there were newsletters that could help you reach your objectives, how would you go about locating them in advance?
If someone truly possessed profitable stock tips, trading advice, or a secret formula to make big bucks, they would not blab it on television or sell it to you for $49 per month.
Instead, they would keep their mouths shut, make their millions, and not need to sell a newsletter to make a living.
The solution is to spend less time watching financial shows on television and reading newsletters, and spend more time developing and adhering to your investment plan.
The failure to see the bigger picture
A qualitative analysis, also known as looking at the big picture, is one of the most important things for a long-term investor to do.
Peter Lynch, a legendary investor and author, once stated that he discovered the best investments by looking at his children’s toys and the trends that they would take on.
The brand name is also very valuable. Consider the fact that almost everyone in the world is familiar with Coca-Cola; the financial value of the name alone is therefore measured in the billions of dollars.
Whether it’s about iPhones or Big Macs, no one can argue against the fact that real life is the best investment.
So pouring over financial statements or attempting to identify buy and sell opportunities with complex technical analysis may work a great deal of the time, but if the world is changing against your company, sooner or later, you will lose.
After all, a typewriter company in the late 1980s could have outperformed any company in its industry, but once personal computers started to become commonplace, an investor in typewriters of that era would have done well to assess the bigger picture and pivot away.
When reviewing a possible investment, qualitative analysis is a method that is one of the simplest and most successful ways to do it without falling victim to investing fallacies.
It is just as essential to evaluate a business from a qualitative perspective as it is to look at its sales and earnings.
Participating in Multiple Markets
Traders who are just starting out may have a tendency to jump about from market to market, trading anything from stocks to options to currencies to commodities futures and so on.
Trading several markets may be a significant distraction, and it may impede the rookie trader from getting the expertise that is essential to flourish in a single market.
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Without Taking Uncle Sam Into Account
You will get a tax benefit on some investments, such as municipal bonds.
Before you invest, you should consider what your return will be after adjusting for tax, taking into consideration the investment, your tax band, and the time horizon you have for your investment.
Before you invest, you should keep in mind the tax ramifications.
Do not pay more than you need to on trading and brokerage fees.
By holding on to your investment and not trading frequently, you will save money on broker fees. Also, shop around and find a broker that doesn’t charge excessive fees so you can keep more of the return you generate from your investment.
Doughvest has put together a list of the best discount brokers to make your choice of a broker easier.
The Risks Involved with Excessive Confidence
Trading is a very demanding occupation; however, the “beginner’s luck” that some novice traders experience may lead them to believe that trading is the proverbial road to quick riches.
This kind of overconfidence is dangerous because it tends to breed complacency and encourages excessive risk-taking, both of which can lead to a trading disaster.
There have been a number of studies, one of which was conducted by Burton Malkiel in 1995 and titled “Returns From Investing in Equity Mutual Funds,” which have shown that the majority of managers would underperform their respective benchmarks.
We also know that there is no reliable method to select, in advance, those managers that will outperform.
Furthermore, we are aware that very few people are able to time the market in a way that is profitable over the long term. Consequently, why do so many investors have such a high level of confidence in their ability to time the market and/or select managers who will outperform? Fidelity guru Peter Lynch once made the observation that “there are no market timers in the Forbes 400.”
Newcomers to the Day Trading Market
If you insist on becoming an active trader, think twice before day trading.
Day trading can be a dangerous game and should be attempted only by the most seasoned investors.
In addition to investment savvy, a successful day trader may gain an advantage with access to special equipment that is less readily available to the average trader.
Did you know that the average day-trading workstation (with software) can cost in the tens of thousands of dollars? You’ll also need a sizable amount of trading money to maintain an efficient day-trading strategy.
The need for speed is the primary reason why you are unable to effectively begin day trading with the additional $5,000 in your bank account.
The systems of online brokers are not quite fast enough to service the true day trader; literally, the difference between a profitable trade and a losing trade can be as little as a few cents per share.
The majority of brokerages recommend that investors take day-trading courses before beginning their day trading careers.
If you are not particularly good at dealing with risk and stress, there are far better possibilities for an investor who is wanting to generate wealth.
If you do not have the experience, a platform, and access to quick order execution, you should hesitate before engaging in day trading.
Not Taking Your Capabilities Into Account
Some investors tend to believe that they can never excel at investing because stock market success is reserved for sophisticated investors only.
This perception has no truth at all. While any commission-based mutual fund salesmen will probably tell you otherwise, most professional money managers don’t make the grade either, and the vast majority underperform the broad market.
With a little time devoted to learning and research, investors can become well-equipped to control their own portfolios and investing decisions, all while being profitable.
Remember, much of investing is sticking to common sense and rationality.
Besides having the potential to become sufficiently skillful, individual investors do not face the liquidity challenges and overhead costs of large institutional investors.
Any small investor with a sound investment strategy has just as good a chance of beating the market, if not better than the so-called investment gurus.
Don’t assume that you are unable to successfully participate in the financial markets simply because you have a day job.
Conclusion
If you have the financial means to invest and are able to steer clear of these common blunders made by novice investors, you may be able to make your investments profitable, bringing you one step closer to achieving your monetary objectives.
As an individual investor, the best thing you can do to pad your portfolio for the long term is to implement a rational investment strategy that you are comfortable with and willing to stick to.
This is because the stock market has a tendency to produce large gains (and losses), and when this happens, there is no shortage of erroneous advice and irrational decision making.
Take satisfaction in your financial selections, and over the course of time, your portfolio will expand to reflect the soundness of your activities. If you are seeking to make a large victory by risking your money on your gut instincts, you should try your luck at a casino.
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