Investing 101: 6 Pitfalls to Avoid

One of the reasons why investing can be such a daunting prospect is how common the promises of financial successes can turn into failures instead. Whether it is trading in stocks or bonds, wins and losses are part of the game. There are no two ways around it. Even seasoned investors will get it wrong from time to time, after all. However, just because there are things that boil down to chance and luck, it doesn’t necessarily mean that we have little to no control over the outcome. On the contrary, with a little bit of awareness and planning, you can steer clear of investment mistakes and improve your odds for success. And in this article, we’ll discuss some of the most common pitfalls you can and should avoid when investing.

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1. Investing in enterprises that you don’t fully understand


It is common for inexperienced investors to eagerly gravitate to new trends and hot commodities without knowing what it is all about. And find out later on that it wasn’t as profitable as it appeared to be or fail to take advantage of benefits that they didn’t even know existed. If you want to maximize the profit potential of your investment and minimize the financial risks associated with it, you must always give yourself some time to familiarize yourself with the enterprise before you make any monetary commitments to it. Doing so will tip the scales in your favor and improve your chances of getting the returns that you want.

2. Not keeping an eye out for investment fraud

Scamming is commonplace in the trading world and it happens more than people think. Even if there are experts like who can recover your money in these types of situations, it is a general rule of thumb to try and avoid fraudulent investments altogether. It isn’t complicated either; you can keep away from these schemes by looking for telltale signs of fraud such as claims of quick returns and high profits, overbearing sales pitches, and unsolicited offers. You must also make sure that the individual who is selling you the investment is licensed. It may sound like a lot of work now but it will help you minimize the risks of getting scammed.

3. Being impatient


Being a successful investor is all about adopting a slow but steady approach in growing your portfolio. And being impatient and making impulse purchases will only lead to disaster. As such, you must remain calm and disciplined and keep all of your expectations at a realistic level. Never make any decisions without careful consideration. This may not lead to quick returns but it will improve your chances of reaching your long-term financial objectives.

4. Not building your positions gradually

When it comes to investing, time and not timing will be your greatest asset. The vast majority of successful investors tend to purchase stocks with the expectations of higher financial rewards down the line – be it via price dividends and appreciation among others – over the years. What this essentially means is that you can also give yourself some time buying the stocks. And in the process, build your positions safely and gradually. To this end, here are some strategies that will allow you to reduce the exposure that you’ll have to volatility:

  • Dollar-cost average. It may sound complicated, but the term essentially refers to making investments of consistent amounts at unchanging and regular intervals. The money you put in will then purchase more shares whenever the chosen stock prices go down and less when it goes up. However, the average price paid will even out with this method.
  • Purchasing in thirds. Not unlike the abovementioned strategy, this method will allow you to keep away from the disappointing experience of less-than-desirable results from the outset. As the name suggests, the strategy is about dividing the amount that you’re willing to invest into three. After which, you’ll select three different points to purchase the shares that you want.
  • Purchase the basket. If you are unable to decide which business in a specific industry is worth investing in, you can always purchase them all. At its core, this is what purchasing the basket means. Giving yourself a stake in all players will mean that you will always have a winner. And as a result, you can offset any potential losses that you get. However, this is a sizable investment, and you’ll need to commit a considerable amount of financial resources to take this route.

5. Trading overactivity


Assessing your stocks at least once every quarter when the reports come in is more than enough. However, many new investors have a hard time keeping their eyes out of the scoreboard. As a result, many overreact to minor dips in the market, keeping their focus away from the value of the company and into share price alone. And this, in turn, can lead to committing unwarranted actions. So when you see your stocks experiencing sharp movement prices, take the time to learn more about the trigger for the event. Ask yourself if the cause is something that may potentially affect your position and outlook in the long-term. Only after should you commit to any actions.

6. Not planning ahead

It can be tempting to make changes with our stocks as investors, especially when circumstances aren’t looking too good. But these impulse decisions can potentially lead to the familiar investing gaffe of selling low and buying high. It is for this reason that you must always plan ahead. By writing down all of the stocks that you have committed to, what your expectations are from them, and what situations may lead to sell, you’ll keep your financial risks at a minimum.

Investing is like creating a business – there’s always a risk involved with the endeavor. However, with a healthy level of preparation and planning, you’ll be able to avoid many of the mistakes that could compromise your investment and create potentially irrecoverable setbacks. And as a result, present you with a lot more opportunities to succeed than you would have otherwise.