7 BEGINNER MISTAKES TO AVOID IN THE STOCK MARKET
Investing in the Sock Market
Okay, so the stock market has been exploding in interest and newcomers over the last 18-24 months. In fact fifteen percent of current retail investors for North America only began investing in 2020 during the pandemic, a new Charles Schwab survey showed. So I feel this article is very timely. Also with the massive media attention Reddit WallStreetBets is receiving and the advent of meme stocks like AMC or GameStop where some folks made a lot of money while most either broke even or lost a significant amount of their investment. This article is even more important for beginners making their first foray into investing. Getting caught up in the media frenzy surrounding these single meme stocks while disregarding the fundamentals of the company’s performance and the basics of investing is a sure fire way to find yourself broke and out. So be smart, do your research and at the very least follow the below key tips.
I’ve also highlighted some of the key mistakes I wish I avoided when first starting to invest, so don’t be like I was, learn from my mistakes. One such example which springs to mind was losing a lot of money investing in Ethereum in my early 20’s, which I knew almost nothing about, newbie right! Avoid the following beginner mistakes like the plague. Also feel free to skip ahead if you are well versed in any of the key areas. Applying these tips will result in you being far wealthier for it, and also far less worried about your overall investment risk. You will sleep easier too, or at the very least be content in knowing you have a solid investment strategy based on tried and tested fundamentals.
“Getting caught up in the media frenzy surrounding single Meme stocks while disregarding the fundamentals of the companies performance and the basics of investing is a sure fire way to find yourself broke and out”
1) Not doing your own research –
I see and hear of this all the time. You work hard for the money in your pocket, why throw it away on an investment that you know little to nothing about. Do your research so you understand what you are really getting into. Investing is not like buying a pair of shoes and you shouldn’t buy a stock because your neighbour or friend at school told you to. Instead up-skill and research your chosen stock. Use online financial websites (e.g. Reuters, Financial Times) the small subscriptions paid here will pay you back multiple times over. Use other online resources like Youtube – there are some really solid, fact based investing channels I’ve learned a lot from. Let me know if you want me to share these with you in the comments section below.
You can even go the traditional route and look at your chosen stocks financial statements (all publicly available) to get a solid understanding of key areas such as the company’s background, leadership, performance, cash, debt etc. These are all key drivers of the stock price in both the short and long term.
Have an independent line of thought, not your neighbours best guess, or something you heard on the news. Key tip – research and form your own opinion before you buy!
2) Choosing the wrong investment strategy –
When I was growing up, I always imagined anything to do with the stock market as men in old school pinstripe suits staring at huge screens, crammed together shouting over each other, making funny hand gestures! The typical movie scene representation of the New York Stock Exchange.
Don’t worry you don’t have to be one of those guys/gals, times have changed (although these places still exist). You first need to understand the difference between speculative trading and investing. Trading is short term in nature and risky with the aim to get in and out of a stock and profit. To be honest I see this as more like gambling especially for a beginner retail investor. There are so many studies out there that show the vast majority of retail day traders never make any money (90% of traders fail to make money).
Investing on the other hand comes with a longer time horizon with an eye towards growth over the long term. You are not looking to buy and sell a stock for a quick buck, but holding the stock long term because you believe in the company’s fundamentals and future expected performance. When I invest – my goal is to build a fortune over time, not make a quick profit, also keep in mind short term trading can lead to larger capital tax payments, an added drawback. Key tip – choose the right investment strategy.
3) Paying too much in investing commissions –
There are a lot of brokers out there who charge significant commissions every time you buy or sell, or sometimes even for holding a stock. There is no reason to be paying these charges anymore. There are lots of options for no fee investing, one widely known example is Robinhood but there are so much more. Key tip – shop around before committing to a brokerage.
4) Not setting realistic expectations –
When I first started investing in the stock market, I was so excited. I opened up a brokerage account with the first one that popped up on Google search (ThinkorSwim for anyone who remembers). They charged astronomical commission fees (see step 3 above) and I immediately thought I would become the next Carl Icahn protege. Unfortunately it didn’t go as planned, after two months I was down ~20% across the 3 single stocks I owned. As I have grown and matured and learnt from experience, the key saying “slow and steady wins the race” is so apt when it comes to investing. Know that it will take time, consistent investing to grow your money.
Key tip – don’t expect to become a millionaire overnight and set realistic goals. You’re betting on future performance and unfortunately you are not Elon Musk with the power to affect the stock market price. I keep my net worth updated here, so you can see a realistic timeframe of returns and investment growth, and also check out my post on how I saved $150k in 3 years.
5) Falling in love with a company –
“Falling in love with your position”, this happened to me when I first started out. I invested in a local Irish bank that I and my family grew up using, I became emotionally attached to the company, and ignored all the red flags (e.g. poor performance quarter after quarter, sudden exit of leadership). I didn’t even consider selling the stock because I was so attached. I held on, and eventually it went down over 70%. Learn from me – always have a game plan on how and when to exit a stock. Let me know in the comments your best or worst investment. Key tip – invest with your head not with your heart!
6) Relying your investment strategy totally on “experts” –
I’m not sure why this is, but so called ‘Experts’ you hear on the news, tv and radio most of the time have no idea whether a stock will go up or down in the future. They are just using their best guess. No one can predict the future. Most of the time I’ve found these experts also hold significant amounts of shares of the stocks they are touting to buy. So maintain a skeptical bias on what you hear and read.
Key tip, have an independent thought process and take ‘Experts’ recommendations with a pinch of salt.
7) Last but by no means least is perhaps the most important – not diversifying your investments –
Investing all of your money in a few single stocks is the most common investing mistake I see with beginners. Anything can happen to a single company, for example the oil industry crash or cruise line crash caused by the pandemic. Stocks like Air Canada(AC) and Carnival(CCL) have still not recovered anywhere close to pre-pandemic levels. If you are invested in single stocks this greatly increases your risk. I’ve moved now almost exclusively into index funds. For me it is the best way to invest and the reason it is touted by leaders in the investing space (e.g. Warren Buffet, Kevin O’Leary). Invest in broad based indexes where you can still take advantage of upside returns, on average anywhere from 7-12% per year historically. Plus you can still receive dividend payments. I like Vanguard indexes like VTSAX, VTI or VOOV. You can instantly diversify across hundreds of stocks and for very low to zero fees. There are so many options out there.
Key tip, diversify, diversify, diversify! don’t invest in single stocks, invest in low cost index funds.
Great, hopefully now you are more equipped with the fundamentals of investing and starting your financial freedom journey. As always, I hope you find some of these areas helpful in your own journey to whatever your goal is. Make sure to follow along on my journey on how this thing called life and my goal of financial freedom works out, I keep my net worth updated here. Sign up to my newsletter, you will receive some great free content such as a first steps to financial freedom guide and an overview of the easiest sites/places to invest, While also staying up to date on my latest blog posts to show you the path forward. I post at least weekly and no spam, I promise.
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Catch you soon,