Lately, I’ve been asking myself…
Why is it so many people never start investing?
It’s a rewarding practice that can have a tremendous benefit in one’s life.
What I’ve discovered is that most people actually do try investing but stop because of a negative experience.
The unfortunate truth is that almost everyone’s first contact with financial markets is painful. It’s just the way it is. You need to learn the ropes before you can begin enjoying the benefits.
However, after losing money, most simply decide that investing is not for them.
This is a shame because many of the mistakes can be avoided.
I’ve pinpointed the three most common mistakes, especially among just-getting-started investors, and how to avoid them….
Mistake #1: Being Narrow Minded
One mistake I see often is listening to the wrong type of advice. Or, better put, not listening to enough different advice.
Investors will hear a friend or an analyst they follow suggest a stock. And, because they trust that person, they act on the recommendation.
Of course, there’s nothing wrong with doing that. You are, after all, reading about my advice right now.
My point is that you should also seek other opinions. See what different analysts think about a specific stock before acting.
And, most important, look at the other side of the coin. What are some of the arguments against the stock you’re looking to buy?
By doing this—studying your investment from every possible angle—you’ll have a much better sense of the risks and opportunities associated with your purchase. Furthermore, you’ll increase your chances of picking winning stocks. And, if you end up losing money, at least you’ll know that you made the investment with your eyes (and mind) wide open.
Mistake #2: Impatience
Another issue is lack of patience.
You’d be surprised how detrimental this can be to one’s investing success.
Impatience comes into play most commonly when investors are tempted to sell winning stocks too early.
Seeing a trade go up, many investors want to sell soon afterward. They’ve made some money and are afraid that their profits could be wasted if they don’t cash out immediately.
Not so fast. Timing is as important when selling a stock as it is when buying.
Remember that you are an investor, not a trader. Your investment horizon should be at least one year. Only then should you begin to think about selling.
Moreover, consider whether the company’s prospects, the reason you invested in the first place, have materialized. If yes, then it’s OK to exit that stock. Otherwise, stick with it.
The other time where patience is crucial is when you’re staying on the sidelines.
Sometimes, like at this specific moment in time, for example, there simply aren’t many attractive buying opportunities, and so you’re forced to wait.
Waiting, however, can be quite difficult.
Making money in the stock market is a positive experience. Our brains yearn for it. As a result, you might allow yourself to buy something just because you want to be “in the game,” not because it’s necessarily a good investment.
The best remedy here is to put extra focus on the downside risk. Acknowledge that by staying on the sidelines, while you’re not making money, you’re also eliminating risks of losing on unnecessary trades. And remind yourself that buying opportunities will return sooner. You’ll be back in the game soon enough. Be patient.
Mistake #3: FOMO
The final and probably most devastating mistake first-time investors make is the notorious FOMO (Fear OF Missing Out).
I once heard a legendary hedge fund manager say that, “the hardest thing about investing is watching others make money.” Remember that. It’s a phrase that can save you a lot of money.
Here’s how FOMO gets you…
A stock, a sector, or an asset is seeing tremendous returns. The early investors are, of course, profiting from the surge and, typically, bragging about their returns.
To make matters worse, media loves big wins and devotes extra attention to them.
So, you have a situation where, apart from a few smart people who bought early, most investors are watching a stock price rise while being constantly reminded by the media and some fellow investors how dumb they were for not getting in at the right time.
The feeling of having missed out grows so powerful in some that, eventually, they can’t handle it anymore. They worry how much further the price could increase without them and decide to buy, disregarding logic completely. The important thing for them is that, now that they’re in the trade, the fear is finally gone. They’re not missing out anymore.
The harsh truth is that, if FOMO is the reason you’re buying, you now have real reason to be afraid.
The best way to avoid FOMO getting to you is simply to admit to yourself that you missed out on an opportunity. And that is perfectly fine. Nobody catches all of them. It’s impossible to have a perfect track record.
And you can rest assured that there will be plenty of other opportunities in the future.