Pitfalls to Avoid When Investing
The Worst Habits Investors Should Drop
When it comes to investing, you have many things to consider. However, if you’re going to be a successful investor, you need to lose the habits that will prevent you from making money. Some of the worst practices to be aware of are as follows:
Bad Habit #1 — Falling in Love
When it comes to investing, falling in love is a bad idea! A rule of thumb for investors is that you should never fall in love with a stock in your portfolio. But unfortunately, it happens when you see a stock you like, and you soon turn into someone willing to ride or die, even if the stock price falls off a cliff the next day.
Falling in love with a stock is not intelligent or logical. On the contrary, it can cloud your judgment on whether to buy, hold or sell, and may wind up costing much more than you expected to lose in the first place.
You have to keep things in perspective when investing in stocks (or any other type of investment). Investing should be based on sound and intelligent decision making where proactive research in company fundamentals like price to earnings or how much cash it has on hand to fund operations weighs heavily into your investment rationale.
Bad Habit #2 — Trading on Emotion
Another common bad habit exhibited by many is those who trade on emotion. Trading on emotion is almost self-explanatory, but specifically, it can be summed up in someone abruptly buying or selling one or more securities based on the fear of missing out or wild price swings in the market.You should not be reactionary when investing. Also, understand that stock prices aren’t always going to trend in one direction. Therefore, spontaneously buying or selling a stock on a whim is not the proper way to invest.
Adjust your thinking, and understand ahead of time that there will be market fluctuations that will affect the price of a stock. Additionally, assess your risk tolerance — examine what amount of money you are willing to invest in a stock. Finally, ask yourself what you’re willing to lose should your investment flatline.
Furthermore, don’t be someone who follows the crowd when choosing your investments. The same thinking applies when it comes to significant selloffs.
Bad Habit #3 — Not Properly Researching
Do your homework! Choosing suitable, solid investments to include in your portfolio begins with much research. Do not make the mistake of selecting stocks based on hearsay or what someone else thinks is a good investment idea while not bothering to first look at the company’s fundamentals.
The individuals inclined to take this reckless approach to investment are also the same kinds of investors prone to falling in love with a stock or trading on emotion.
Any portfolio manager worth his salt will agree that research is vital when choosing good investments. According to one article on NASDAQ.com, there are several fundamental metrics you’re going to want to consider when selecting a stock:
1. Return on Equity (ROE) — Considered a gauge of a company’s profitability.
2. Price-to-Earnings Ratio (P/E) — is used to determine a company’s value.
3. Free Cash Flow (FCF) — cash on hand to repay creditors, maintain operations, and pay dividends.
Each one of these metrics, as previously mentioned, is an excellent gauge in determining the actual state and subsequent value of a company’s stock. While this is only the tip of the iceberg, it may serve as a good starting point for anyone looking to research and invest in stocks.