6 Wrong Ways to Approach Investing
Sometimes the best way to learn how to do something is to first learn how NOT to do something. Nowhere is this more apparent than in investing, where no matter how many times you tell people they’re doing it wrong, they can’t seem to help themselves. Nevertheless, the first step to improving how you approach investing is to understand what exactly you’re doing to frustrate yourself so badly. Below I’ve come up with six different reasons why you may be failing in your investing practices and what you can do to improve. If you have never invested before, these will hopefully help you to spot and avoid these mistakes in the future.
1. You Are Trying to Get Rich Quick
When people tell me that this is the reason they want to start trading in the stock market, I metaphorically slap them upside the head, then proceed to tell them to save your time and just go to a casino. If this is the main reason you want to invest, just don’t. You will be very disappointed if you do. The stock market is not a slot machine: there is a lot of planning and strategy involved to grow money over time. You or your friends may have taken a gamble and made money on penny stocks, but never think that you will keep winning forever this way. If you think trading means you’ll get rich overnight, you’re sadly mistaken. Go to Atlantic City instead.
2. You Are Trading Stocks With No Plan
I don’t remember who said it, but failing to plan is essentially planning to fail. Investing is incredibly important and you should never jump into something so important without having a roadmap of where you are going and what you are looking to achieve. Before you buy (or sell) any stock, you must understand the risks involved, how tolerant you are of risk, how much you are willing to lose before you decide to exit, is this really the best option for me now, etc. Blindly accepting investing advice from an analyst, a newspaper, a TV anchor, or the “experts” is NOT an investment strategy. Understanding your own plans and your own needs will make you a successful investor.
3. You Only Think Short-Term
I know individuals who only to invest based on short-term pops in stocks due to news, earnings, or initial public offerings (IPOs) – all of which may work once or twice, but this is not the mindset you want to be in. Think of it like climbing a big mountain: there’s a long trail that leads to the summit but it takes a really long time to get there. However, there is a really strong certainty that if you take this trail you will make it to the top eventually. Now, you could try to scale the mountain straight up the side: it’s shorter and you’ll reap the benefits of making it to the top sooner rather than later. There’s no guarantee you’ll reach the top if you climb this way: you could slip and fall all the way back down, you could make a huge advance only to have that negated by another big drop. In other words, you may take two steps forward, then three steps back, and this is not progress. Slow and steady wins the race, kids.
4. You Have Overconfidence
So you bought a penny stock and made a 50% return in a day – so your $1.00 stock went to $1.50 – and you’re sitting on Cloud 9. Good for you! Then tomorrow, some news drops that global markets are in decline so your investment goes from $1.50 back down to $0.75 – for a 25% loss. Then for whatever reason the stock stays at that price, for weeks, months, and years. Yet, you still think you were so clever for that initial 50% gain, you hold onto the stock forever feeling confident that it will come back. Overconfidence leads to a whole slew of problems in the stock market; you may ride the greed wave higher with everyone else, but what goes up will eventually come down again. If you take anything away from this article remember this: you are NOT as clever as you think you are.
5. Obsession With Uncontrollable Factors & Taking Losses Personally
Every time the stock market plummets there is mass panic among investors and they think all of their money is gone forever. This is rarely the case, but it does not stop investors from feeling depressed or bad about themselves. Losing money is a personal thing; if you lost $1,000 playing poker, you might feel bad about it and start blaming external factors for your loss. In the end, the loss was beyond your control, and difference between poker and the stock market is your loss might actually fix itself if you give it time. Markets will rise and fall, but never think that either is permanent and never try to blame yourself or someone else for the loss – some things are beyond your control.
6. You Aren't Using Your Own Brain
No one knows you, better than you. Only you know how tolerant you are of investing risks and what kinds of companies you want included in your portfolio. This may shock you, but market professionals, everyone from your broker or the guy on TV, they don’t know everything. Yes, shocking right? Sometimes they are right about stocks, and sometimes they are VERY wrong about stocks. For instance, if a stock expert on TV says energy stocks are going through the roof this year, you may want to ask yourself, why? How can they possibly be making money when gas prices are at 11-year lows? Take advice with a grain of salt and do your own homework. Sometimes those in the media are paid big bucks to push stock ideas to the public, other times they take rough guesses. Use their advice only as one piece of the puzzle, they can point you in a direction but you should make sure that the way won’t ultimately lead to a wall.