Getting off to a good start
4 Beginner Investment Mistakes
by Joshua Rodriguez
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Should I Stop Contributing to My 401k So I Can Pay Off Debt?
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Investing is one of those things that we all know we need to do. So, tons of people jump right in without doing the research it takes to make sure that you are profitable. However, you're here. You obviously want to know how to stretch your investment dollars further. We've got just what you're looking for. Today, we're going to be going over four mistakes that you should avoid as a new investor. So, let's jump right into it!
Mistake #1: Trading Too Much
This is not only the first mistake I've decided to tell you about, but it's also the most commonly made mistake among new investors. When you start investing, it's easy to want to trade often. As you see investment values drop slightly, you want to sell those investments. As you see investments go up slightly in value, you may want to buy more shares. However, it's important to remember that if you overtrade, you'll lose money quickly.
Why is that?
The broker that you decide to use, no matter if they're online or off, needs to make money. So, every time you trade, they are going to charge a fee for the trade. Although trade fees may seem very little, ranging from $1 to $10 in most cases, that little bit really adds up.
So, should I just let my investment values fall?
Yes and no. Minor changes in the market aren't something that you want to jump into a trade over. The truth is that I've watched my investments go down slightly. I've gotten nervous. In the beginning, I would trade and get into some other investment. However, I never really made anything. Then, I decided on one of my investments that I would just wait it out and see what happens. After a few minor drops, the value started going up. Finally, I made profit. All of that being said, it's best to set a loss threshold. In this case, you'd keep the investment until it got to a loss point that you just couldn't be comfortable with. If it doesn't hit that point, you hold the investment and wait for the value to go up.
Mistake #2: Knee Jerk Reactions to News
This is another big one. We've all seen movies where investors watch the news and trade immediately after what they think is something big happens. The simple fact is, in most cases, what you see on the silver screen isn't exactly what you get in real life. When it comes to investing, that's exactly the case.
An Example of This
When Twitter announced its IPO, under TWTR, it was anticipated by tons of investors. The starting price was $26. During that first day, the value of the stock rose to $50+ and eventually fell back down to $44 and some change. Because of the huge climb and the fact that Twitter is a social media giant, this got extensive news coverage. As a result, one of my friends purchased a share of TWTR the next day. Unfortunately, he hasn't made a dime! Fortunately, he didn't buy a bunch of shares.
Why TWTR Didn't Go As Planned
Although tons of investors put money into the company, in the time the shares have been on the market, as of this writing (2014), Twitter hasn't turned $1 in profit. As a matter of fact, they haven't gotten to $.01 in profit yet. Media hype caused tons of investors to buy into this investment. The only problem is that it's a very uncertain investment. Investors don't know if they're going to make anything. It seems like they've all invested on knee jerk reactions to media without first getting a glimpse of what to expect. For them, they still could see growth in their investments (and I hope they do), but trading on uncertainty is never a good idea.
editor's note: The above stock example is a few years old now but the lesson is a good one for beginning investors.
Mistake #3: Automatically Assuming That a Great Company Is A Great Investment
This is another huge mistake. I can't tell you how many people I've talked to that say they invested in this or that company because it's a huge company, saying, "How can I lose?" Well, the bottom line is you can lose. Many times, investing in huge companies is the worst thing you can do.
What, what, what, why?
Think of what happens with investments. If the value of a company goes up, the value of the investment goes up. If the value of a company goes down, the value of the investment does the same. Now thinking of companies to invest in, it's important to think of how the growth of that company will take place. If the company is already huge, they may have a very slow growth. That means that you get very slow and very little returns. On the other side of the fence, if you invest in relatively decent sized companies that have a good game plan, chances are their profits will soar much faster than a large, household name.
Mistake #4: Getting Too Comfortable With One Investment
As a new investor, one of the first things that you're going to need to learn is that diversification is key. That being said, sometimes new investors start off with several different investments. When they look over their portfolio, they see that one investment is doing better than all of the rest. So, in order to make more, they move all of their money into that one investment. Seems like a good idea, right?
Wrong, and here's why...
The reason we need to diversify investments is to ensure that if one company goes down and does it quickly, the rest of our investments are safe. I've seen companies skyrocket in price, and then seemingly overnight, they were out of business. If the company that skyrockets in price takes all of your investment dollars and then plummets, you could lose absolutely everything! Although it may seem like a bad idea to keep some money in lesser performing investments, doing so will keep your money safe!
After reading this, you've probably noticed a trend in all of these mistakes. That trend being that these are all knee jerk reaction based mistakes. Trading too much, overreacting to news, automatically investing in big companies without doing research, and reacting to great performance by putting all of your eggs in one basket all stem from one thing. Ready for it? That thing is emotional trading. When trading, emotions can cause you to make poor decisions as fast reactions to just about anything. That being said, the best advice I can give you is to think every investment you make through thoroughly!
This post has been brought to you by Joshua Rodriguez, a staff writer over at ModestMoney.com. Check out his recent comparison of the best online brokers, including his Prosper Loans review and his OptionsXpress investing review.
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