The average return on stock investments is about 10% per year, so shares are a great way to build generational wealth. But there are plenty of things that can go wrong if you’re not careful. The good news is that many of these mistakes are easily avoidable with some simple changes to your strategy.
Here are seven common errors for stock investors and how you can avoid them.
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1. Focusing On Short-Term Results
The stock market is a fickle beast. While a company’s past performance can be indicative of future returns, it’s not always the case. Investors shouldn’t base their stock investment strategy on how quickly they’re paid or how much money they make.
Never lose sight of your ultimate investment goals, and ensure your portfolio aligns with your dreams. When losses happen, consider whether your investment will rebound in a few years. If so, hold on to your shares.
2. Investing in One Sector
When you’re new to investing, it’s tempting to put all your money into one thing. But if you only invest in one sector and that sector tanks so does your portfolio. You might not be able to recover from such a loss.
Your options for stocks are endless, so focus on diversifying. Invest in opposing sectors so your portfolio remains balanced when one of your investments falls through.
Look at geography and industry when thinking about how best to spread out your risk.
3. Not Using a Professional Advisor
Most people who try to trade stocks on their own end up losing money because they don’t have the right tools or knowledge base at their disposal. To minimize your losses, get in touch with financial experts.
Swing trading services can help guide your investment decisions. They’ll also keep tabs on how well (or poorly) things are going for your portfolio each year.
4. Lack of Research
There are many ways to conduct research, but the most important thing is that you do it! Too many investors pass this task to an assistant or trust the advice of their peers. However, you need to know what makes your investment a good one, and research is the only way to get that information.
You can find a lot of essential facts by reading the company’s annual report, SEC filings, and 10-Ks. Get in touch with the company’s investor relations department and ask questions about their business model or product line.
Researching your investments will help you understand how they work and what risks are involved with them.
5. Taking Too Many Risks
Every investor takes risks when they buy stocks. What many people don’t realize, however, is that there are several kinds of risks involved with the stock market.
Market risk is the chance that market conditions will make your stock go down in value. Economic downturns and fluctuating demand are two of the biggest market risks that stock investors face.
Company-specific risks are anything within a company’s control that could cause its share price to fall. Terminating a beloved board director or having unfair wages are examples of things that can turn investors away.
Liquidity risks involve a decrease in your stock investment profits. To distribute earnings, a company must have enough cash flow to support its daily operations. If not, it will cut back on its dividend payments.
These are only a few of the risks you face when investing. Try to learn as much as you can and see which companies are most likely to be affected by each.
6. Investing for the Wrong Reasons
Some investors turn to the stock market because it’s what their parents did or because their friends are doing it. These are not good reasons for risking your hard-earned money.
Having a good investment rationale gives you the strength to keep investing when stock market trends are falling. Here’s an example of a good reason.
You want your money to work hard so that when you’re ready for the next big purchase—like buying land or starting a business—you’ll have extra cash on hand. It’s easier to make your dreams a reality without having to rely on banks for loans.
7. Staying On Top of the Markets
Do you check your portfolio every day or at least once a week? If so, you’re more likely to get nervous when the market goes down. And we all know what happens when you’re nervous—you make rash decisions that can hurt your portfolio.
Instead of checking every day, set a schedule for checking in with your investments. For example, review them once a week on Monday mornings and then again at the end of the week.
Remember to analyze your portfolio as a whole. If one sector is doing poorly, check to see if one of your other investments can offset those losses.
If a company is doing badly today, that doesn’t mean it won’t be making a comeback tomorrow. Short-term losses can be overcome with patience and time. Don’t sacrifice having a diverse portfolio because you’re worried about one stock.
Avoid These Errors for Stock Investors
Being mindful of these common errors for stock investors will help you build a better portfolio. Remember that investing is a long-term process, so don’t let short-term losses get you down. Check on your investments regularly, but don’t panic if one stock is going down.
Make informed decisions with your portfolio, and be sure to seek help from a financial advisor if you aren’t sure what to do. If you can’t find anyone to help manage your money, check out our finance section for advice on managing it independently.