Although many institutional investors fled the market in the early stages of the pandemic, retail investors poured in and profited handsomely, especially in surging technology stocks. Of course, playing the market carries risks. Reports are abound of newcomers making rookie mistakes and of seasoned investors falling short during the stock market's relentless rally.
Here are Six DIY Investing disasters to stay away from:
1. Having a Love-Hate Relationship With a Stock
When we see a stock we've invested in do well, it's all too tempting to fall in love with it and forget why we purchased the stock in the first place. Always keep in mind that you bought this stock to benefit from it. Consider selling the stock if any of the fundamentals that caused you to invest in the business change.
2. Patience Shortfall
Long-term returns would be higher if you expand your portfolio slowly and steadily. It's a formula for failure to expect a portfolio to do what it wasn't built to do. This means you must keep your plans for portfolio growth and returns reasonable, and have a relevant time horizon in mind.
3. Uncertainty About Investment
Warren Buffett, one of the world's most influential investors, advises against investing in businesses whose business models you don't understand. Building a diversified portfolio of exchange traded funds (ETFs) or mutual funds is the safest way to prevent this. If you do decide to DIY invest in individual stocks, make sure you know everything there is to know about the company.
4. Going in without a plan
Without keeping in mind factors like one’s financial goals, risk appetite or investment time horizon, going ahead with investments is not advisable. These are important factors to consider when setting about your investment journey. Hence, making a note of these factors, doing necessary back calculations and ensuring that one’s portfolio is on course to meet those goals is important. Taking the help of a financial advisor is recommended for the same.
5. Trying to Predict the Market
Attempting to time the market often has a negative impact on returns if one does not have the necessary knowledge. Timing the share market correctly is incredibly difficult and there are many biases at play when attempting to do so. Even institutional investors do struggle to predict this correctly. Hence, other methods such as SIPs are recommended so as to average out one's investment over time. Moreover, it is important to give your investments time to grow and let the power of compounding weave its magic.
6. Waiting for Break-Even
Getting even is yet another way to guarantee that whatever profit you've made is lost. It means you're holding off on selling a loser until it reaches its original cost basis. This is referred to as a "cognitive malfunction" in behavioural finance. DIY Investors lose in two ways when they fail to recognise a loss. To begin with, they avoid selling a loser, which will continue to depreciate until it is no longer worth anything. Second, there's the opportunity cost of putting those investment sums to better use.
Making mistakes is an inevitable part of the DIY investing process. Knowing what they are, what you're making them, and how to stop them can help your investment success. To avoid making the mistakes mentioned above, make a well-thought-out, structured strategy of stock market advice and stick to it. Just as one does not self diagnose an illness and goes to a doctor, it is recommended to avoid DIY without knowledge, and take the help of a financial advisor to meet one’s financial goals.
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