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Investing may seem intimidating, to begin with, but it’s not just for those with an extensive finance background.
Our previous article on how to start investing highlighted that beginner investors need to conduct thorough research on what stocks to invest in, indexes and exchanges, and the like. To make the process easier, below are a few mistakes every beginner investor should avoid when they are just starting out.
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Not diversifying your portfolio
Beginner investors may be tempted to put all their eggs in one basket, but this can end up doing more harm than good. After all, investing is all about casting a wide net and getting profits from several accounts. While it’s ultimately up to you to decide which stocks you’ll invest in, you should aim to diversify your portfolio with companies of different sizes and that operate in a multitude of industries.
In fact, diversifying your portfolio early on is a surefire way for you to study how different investments move. From there, you can decide which assets you want to increase (or decrease) investments in. You can also rely on asset allocation funds, which are made up of a mix of stocks and bonds. Either way, you should be prepared to get your hands dirty and create a diverse portfolio early on.
Forgetting to use risk management tools
Learning how to mitigate risk is essential for any beginner investor. It’s imperative that beginner investors rely on risk management tools to help them navigate the tricky, ever-evolving world of stocks. As a general rule, working with predefined stops and limits when trading stocks helps control your losses and lock in profits.
As an added measure, some platforms even come with a ‘Guaranteed Stop’ feature, which means you don’t have to worry about losing profits overnight. Online risk management tools are especially useful for getting timely information, and complementing such platforms with risk management tools allows beginner investors to keep track of multiple investments at once. Relying on risk management tools is necessary for when you’re still getting the hang of how stocks move.
Thinking of investments in the short-term
The idea of stops and limits also brings up an important point beginner investors should remember: your stocks will fall. It’s an inevitable fact; so don’t be tempted to sell off your stocks as soon as you experience a drop.
Investors encountering bear markets — characterized by “20% decline in stocks from recent highs and an overall pessimistic feeling on Wall Street” — should remember that these have historically proven to gain value in the long term.
Investing is often a waiting game, so you should make peace with the fact that you might suffer losses even early on. Before you invest in a particular asset, be sure to take stock of your budget and be clear about how much loss you can comfortably shoulder. Having this figure in mind can help you resist the temptation of selling stocks right away.
Learn – How to Trade Cryptocurrency in 2020- A Beginner’s Guide
Beginners who want to step into the world of investments just need a little preparation and background knowledge to get started. Avoiding these top three mistakes can make your investment journey an enriching one.