When it comes to investing, everything is a risk. Even if a stock or a mutual fund may seem promising, nothing is ever certain. The fact is those good investments can turn south in the blink of an eye. But one of the biggest issues that people run into in the investing world is making the wrong decision.
More often than not, inexperienced investors make decisions that have a negative impact on their portfolio. But if you know what not to do before you do it, chances are that you’ll make more sound investing decisions.
Here are six investment mistakes that you don’t want to make!
1. Investing to Invest
Making the decision to invest your money into the stock market is a wise one. But if you’re completely new to investing, it pays to either learn some of the basics or to hire a financial advisor. You don’t want to buy stocks, bonds, and mutual funds without researching what you’re buying. This could cause you huge losses across your portfolio.
Instead of guessing what you should invest in, consider hiring a professional. You can find the best financial advisor in Tampa on Carefulcents.com.
With the help of a financial advisor, you can talk about your investing goals as well as your timeline. Your advisor will then work with you to find investments that make the most sense for your short- and long-term goals.
2. Buying a Stock Because Everyone Else is Buying It
Rarely is it a good idea to buy stock just because everyone else is buying it. Investment bubbles happen often, but the outcome is rarely worth the hype.
The problem is the aftermath of when the bubble bursts. Hot and trending stocks may be tempting to buy, but once the excitement is over, the market often crashes because investors head for the exit at the same time. This causes the stock to drastically lose its value.
Instead of investing based on the hottest stocks at the moment, your best bet is always to research. Learn about the history and fundamentals behind a certain investment before you spend your money on it.
3. Borrowing to Buy
Unless you’re a high-risk trader who knows the rules of investing (and can take a potential loss), you’ll want to avoid borrowing in order to buy. Many sophisticated investors borrow, also known as using the margin, in order to leverage the effects of their investment.
But the safer route to invest is to only spend what you have. If you can’t afford to outright buy an investment and instead want to borrow to get those funds, odds are that you’ll do better with a safer and less risky stock.
Not only does borrowing require you to take on more risk, but you’ll also have to pay interest on the margin loan, which negates your investment earnings.
4. Buying Stock That Lacks Earnings
When you see a stock shoot up in value, you would think that this is a good sign. But there’s much more to investing than value. Another crucial factor that you’ll want to look at is earnings. If a stock’s value goes up but its earnings stay flat or decrease, the stock may be headed into a downward spiral.
Often times, earnings drive stock prices. When a stock price increases but the earnings lag or decrease, this is a sign that you don’t want to invest. It’s ideal to buy investments that are priced fairly or slightly undervalued.
Stocks trading at a high price-earnings ratio tend to be bad news.
5. Buying Hastily
The fear of missing out, also known as FOMO, is a real phenomenon! Many investors feel rushed into buying an investment right now out of fear that they’ll miss out. But a sound investment isn’t one that you make on a whim.
A good investment is one that isn’t good for just right now, it’s one that will be a decision you were happy you made a month and even a year from now. If someone is pushing you to hand over money to invest in a “hot” stock, run away! You’re always better off when you stick to long-term choices that will benefit you for years to come.
6. Buying Because the Price is Low
A low price doesn’t necessarily indicate that you’re making a good investment. In fact, a low price doesn’t mean that the numbers won’t continue to decrease. Stock that has sharply declined in price is often a sign to stay away.
More often than not, stocks that have lost value will only continue to lose value. There’s also the risk that the stock value will stay at lower levels for a long time.
Conclusion
Smart investments can be greatly beneficial. If you’re new to the investing world, it pays to know about some of the common mistakes that investors make. Keep these mistakes in mind so that you can make sound investing decisions.
What are your best tips for avoiding investment mistakes?
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