Financial advisors often warn new investors to be wary of how they approach the markets.
Many people first come to investing with misconceptions that can inhibit their growth and, worse, cause them to lose substantial sums of money.
By learning about some of these pitfalls, you’ll be better prepared to watch for them.
Investing is Not Gambling
Many new investors approach the markets in much the same way that they might approach a casino.
However, there’s more involved in investing than mere luck. Getting a big return from a particular stock or fund once doesn’t indicate a sure thing on future returns.
In fact, there’s very little reason to expect a fund or stock to perform well in the future, just because it did so in the past.
Unfortunately, this doesn’t stop investors from making this mistake time and again. In a study on investor behavior, it was found that 39% of investors buy into the top 10% of the best performing funds from the previous year.
Fear of Loss
While investing shouldn’t be viewed as similar to gambling, that’s not to say there isn’t the risk of loss. Even seasoned investors can become gun shy, after suffering one big loss.
For instance, many people sold off their investments too soon after the housing market crashed and, as a result, they lost a significant share of their capital. Going forward, they may be wary of taking that kind of risk again.
While nothing can eliminate the risk from investing, avoiding it altogether also means that your money isn’t growing. Accepting managed risks is essential in investing if you expect your money to work for you.
Listening to your inner voice and the regret that may come with a bad decision can cause you to miss out on opportunities that may greatly benefit you.
Finding Data to Support Your Bias
This is another common mistake that many investors, new and experienced make when researching an investment. They start off from the position that a particular fund or stock shows promise.
The research that follows is done in such a way that all of the data collected may seem to support that original supposition.
Oftentimes, the investor isn’t even consciously aware that he or she is tainting their research in this way.
When it comes to research, the investor should remain open to all possibilities and try to refrain from developing any preconceived notions. Collect data objectively first and see where that takes you.
Investing takes years of experience to learn and, even then, it’s far too easy to fall into common traps. For that reason, it’s important to always keep an open mind and to be wary of emotionally-based thinking.
Relying on luck or trends can lead to hazardous losses. While risk must be accepted in investing, it shouldn’t be used as an excuse to fuel your superstitions.
Instead, approach investing with an analytical mind, relying on research and data from multiple sources. Only then can you make an informed decision that will help you manage your risks and maximize your returns.
