10 trading mistakes to avoid
Knowing the trading mistakes to avoid – and the warning signs of a bad investment – can help prevent costly errors.
Making your first steps into the world of investing is a daunting experience, but it doesn’t have to be. Knowing the trading mistakes to avoid – and the warning signs of a bad investment – can help prevent costly errors. While some of these trading tips for beginners are common sense, others are pieces of advice that even the most seasoned investors fail to get right.
Understand the business you’re investing in
One of the most common trading mistakes is jumping straight into an investment opportunity without performing due diligence. As tempting as bold financial projections can be, it’s vital to assess the state of the market, analyze the competition, and examine the potential threats facing the company and the industry it is in. Although this isn’t always glamorous work, it can be rewarding, as your expertise can help you detect opportunities that other investors miss.
Treat illiquid investments with caution
As far as investment mistakes though, relying too heavily on illiquid assets can be financially disastrous. Examples include real estate and stocks that aren’t traded on a regular basis. Because these assets are harder to sell, investors can struggle to offload them quickly when prices are falling – leaving them watching helplessly as their losses continue to rise.
Don’t put all your eggs in one basket
One golden rule of trading for beginners is to diversify. Illiquid assets and high-risk stocks can deliver high returns and have a place in a well-balanced portfolio, but they shouldn’t be solely relied upon. Diversification allows you to be adventurous by spreading your risk across industries, countries and investment types – and although it can mean that you’ll make less gains in the short run, it’s often a more lucrative bet in the longer term.
Calculate your appetite for risk
Many rookie investors know that a lack of diversification is one of the common trading mistakes to avoid. But what they fail to realize is that there’s no “one size fits all” approach to diversification. To understand how a portfolio should be divided between low and high-risk assets, traders need to calculate their appetite for risk – and determine the volatility (and potential losses) they’re prepared to stomach. This involves setting out their long-term goals, considering the length of time they will be investing for, and attempting to imagine what their reaction would be if their portfolio’s value fell by 10%.
Remove emotion from your investments
One of the most dangerous investment mistakes that a trader can make is to let their emotions get the better of them. In the heat of the moment, acting impulsively can cause an investor to make the wrong decision and amplify their losses. Thankfully, there are tools that can help a trader’s head rule their heart. For example, limit orders enable investors to establish when they would be prepared to buy or sell stocks well in advance – preventing snap decisions.
Don’t chase losses
If a stock market investment or a forex position goes wrong, it can take a significant financial and psychological toll on an investor. When confronted with a sizeable loss, it can be tempting to enter into bigger positions in an attempt to cover the shortfall. However, these decisions can often be made on impulse – without taking a considered approach and evaluating whether it is the right call. By creating an investment plan and sticking to it, you’ll be able to handle losses dispassionately and move on without making matters worse.
Monitor your investments
Being too absorbed in your investments can be dangerous, but failing to keep an eye on them at all has the potential to be equally catastrophic. If you have an automated strategy in place, it’s crucial to check in every now and again to see how they are performing. Review each aspect of your portfolio to see which areas are doing well, and where there’s room for improvement. Schroders’ Global Investor Study found that 23% of people fail to check their investments at least once a month.
Give your investments time
Patience is one of your greatest assets, and exiting positions too early can work against you. Generally, it’s recommended that investments are held for at least five years so they can mature, but according to the Schroders study, the average investor cashes out in half this time. Constantly chopping and changing can be costly because of the commissions and transaction costs associated with every new trade. As a result, it’s prudent to establish a strategy and stick to it. Just one in five investors stuck to their original plan when turbulence hit the stock market in 2018 – meaning many ended up selling their shares when prices were at rock bottom.
Try not to time the market
Although it can be tempting to try and jump on the bandwagon when stocks are rising, this strategy often backfires – meaning you end up paying for a stake in a company at a premium and realizing very few gains. Such investment mistakes also tie in nicely to the art of being patient, as we talked about earlier. Here’s another example by Schroders. The MSCI World Index represents the 6,000 biggest listed companies in the world. Investing $1,000 in 2003, and leaving it alone until 2018, would have seen the investment soar in value to $4,211. However, when the index’s 30 best days over this 15-year period are taken out of the equation, the investment would only be worth $1,268. Constantly jumping in and out of positions substantially increases your chances of missing out on returns.
Don’t follow the crowd
Expert analysis and news reports can offer a valuable insight into market movements – but this, just like historical performance – should always be taken with a pinch of salt. A “herd mentality” is where investors tread the same path, piling into the hottest stocks because everyone else is. Although this can seem like a safer approach, it often results in bubbles that burst, and means portfolios underperform because lesser-known opportunities are missed.