When it comes to investments, no one can predict the future – not even stock brokers. They just have a lot more information on hand to make educated guesses. However, there are a few rules to follow if you want to enjoy the best chances of success in the stock market. Avoid these tendencies:
- Allowing your emotions to cloud your judgment. Greed and fear will get you every time if you let them. These two emotions can throw any good decision making process off the rails. Greed makes you overlook risk to get to the prize at any cost, blinding you to the rational analysis that you should be doing, says ABC News. Fear can prompt you to sell off your stocks in a panic when the market shows a drop. This isn’t to say you should never get out of a particular stock – just be sure to assess market activity and trading patterns first to make an educated choice not based on emotion.
- Under-diversifying your portfolio. By focusing on just a couple of companies that you may have heard good things about, you’re engaging in what the pros call“familiarity bias.” An example? Employees who get stocks as part of their salary package are considered over-invested in their own companies and should aim to diversify their holdings.
- Over-diversifying. On the other end of the spectrum, many investors buy into too many different stocks in an effort to limit risk, but what they’re essentially doing is decreasing their chances of obtaining good returns. You may own too many stocks across the board simply by way of owning too many mutual funds. You may fare better buying into individual stocks so you can pick and choose the companies you like.
- Relying too much on mutual funds. Investing too much in mutual funds in taxable accounts means you could lose money when taxed on gains that the fund made before you got in. Also, you have to wait until the trading day is done in order to sell. This can be very stressful when the stock is tanking and you can do nothing but wait.
- Playing the market in one direction. If you’re like most investors, you buy into the stock market when you see prices rising. However, the pros look for downward movement and bet on a stock’s decline. This is called shorting stocks. They may also purchase Exchange Traded Funds (ETFs) that short the market, called hedging, in order to protect what they have invested. This risk reduction strategy is underused by amateur investors.
- Failing to use options. These are great ways to pad your portfolio. For example, a covered call rewards you with cash if you promise to sell a stock within a set period at an agreed-upon price. You can take advantage of collecting these premiums and make a profit in the process, especially if you planned on selling the stock anyway.
All of the above warnings can help you augment your investments and avoid common blunders. Having a stock fraud attorney (like TLG) in mind is always a good idea to cover your losses due to possible fraud or negligence by your stock broker.