Investing allows your money to compound over time, but it is important to avoid investment pitfalls which can significantly hamper your returns. By learning these 8 important investment lessons you’ll have greater success in your investment career.
Control your emotions
Allowing your emotions to control your trades will lead to financial disaster. Your emotions are your greatest enemy when it comes to investing. Do not enter and exit trades based on your greed or fear because it will cause severe losses to your bankroll. Learning to be patient and logical is a difficult virtue.
Know what you own, and know why you own it
Do your own research and formulate your own reasoning for investing. Don’t blindly follow investment advice simply because your relative, friend or co-worker recommended it to you (because 9/10 times its a recipe for disaster). If you don’t know why you should own an investment, then you shouldn’t own it.
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Protect your initial investment
Many novice investors smell the returns but fail to see the risks. As a result, they dive into risky investments which can result in the total loss of their initial investment. To avoid this pitfall, be sure there’s an 80% chance that you will be making your initial investment back. In other words, your losses in an investment should not amount to more than 20% of the principal amount you put in.
Diversify, diversify, diversify…until you know what you’re doing
Broad-based diversification is only needed when investors do not understand what they are doing. As a beginner diversifying your investments is important, but once you have a firmer understanding of the market and greater confidence in your opinions, you can adjust your portfolio accordingly.
Know when you are investing and admit it when you are speculating
With every speculative trade be prepared to lose your entire principle. Paul Samuelson says, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas”. It’s alright to make money speculating on trades, but admit you’re speculating when you’re doing it. Don’t kid yourself into thinking that speculating a trade is investing, because you’ll risk losing more money than you bargained for.
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Never catch a falling knife
When a company you’ve been tracking takes a dive and has large drop in stock price, do not jump in right away. The opportunity may be tempting, but it is far better to let the dust settle and reevaluate the investment opportunity before allocating any money into the stock.
Never add to a losing position
Don’t ever, ever add to a losing position. No more needs be said. Adding to a losing position is illogical and will lead to ruin. Everyone seems to have this infatuation with always winning and never losing. Losing is something that happens to everyone. The key is to recognize when you’ve read the situation wrong and cut your losses early.
Invest in yourself
Keep growing your knowledge. Learn different types of analyses and investment strategies. Learn your equities, bonds, commodities, funds and derivative contracts. Through expanding your knowledge, you’ll be better prepared to take advantage of a situation when the right market conditions arise. Ultimately the more you take investment lessons to heart, the richer you’ll become.