With stocks at multiyear highs, many folks are contemplating getting back into the market. The stock market is up again and that tempts more and more people to become stock investors. Folks who bought when the market was low love this scenario. Late arriving investors pour their money into the market just as fundamental analysis of stocks tells the pros that it may be time to take a little profit or get out altogether. The second half of this scenario is that the market turns and falls. Newly arrived investors hang on in the belief that if the market was going up it will surely go up again. Finally, in despair, they pull out of the market, licking their wounds, just as long term stock investors see opportunities and buy low priced stocks with good margins of safety and intrinsic stock value. How to avoid rookie mistakes in investing is to do a little homework before jumping into the market. Take a long term view of stocks that you purchase. Decide when it will be smart to buy and when it will wise to hold and when it will be time to sell. Learn about calculating intrinsic value and identifying a margin of safety in a stock. Learn how to invest in such a way as to avoid letting fear and greed drive your decisions.
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Time, Risk, and Reward
Short term stock gains are possible in volatile markets. So are stock losses. How to avoid rookie mistakes when investing in volatile markets is a four-fold task:
- Learn the fundamentals that drive the stock you want to buy
- Learn the trading skill of technical analysis so that you can read changes in market sentiment
- Decide if you are a short term trader or a long term investor
- Remember that many successful investors do not believe that you can reliably time the market and make profits again and again
If you want to put away money for retirement and you are not interested in sitting at a trade station all day buying and selling, pick stocks with a good margin of safety and high intrinsic stock value. Consider dividend stocks that pay you quarterly and consider reinvesting these dividends. Pick stocks with a reliable rate of return and low risk. Remember the power of compound returns.
Do Your Own Homework
A useful exercise is to think about how to invest $10,000 . What do you want to do with the money once your investments have grown? How long are you willing and able to wait? How much risk are you willing to take? Do you know about diversifying your investment portfolio? What are reasonable expectations when investing in stocks? How to avoid rookie mistakes when investing starts with this kind of thinking. You do not have to run out and buy any stock as soon as you have $10,000 to invest. You can pick stocks as though you bought them and watch how they do. You can develop a process or strategy for picking stocks, watching them, and deciding when to buy more and when to sell. How to avoid rookie mistakes when investing is to learn to do your own homework and not make a habit of following the herd of investment lemmings as it heads for the investment cliff.
Following the Numbers instead of Succumbing to Fear or Greed
Far too many new investors buy in moments of unfounded optimism and sell in moments of mistaken despair. Greed and fear are the twin demons that destroy all too many investors. How to avoid rookie mistakes in investing is to buy and sell stocks based upon sound analysis and clear data. If you cannot say why you are buying except that your friend says it is a good deal you do not belong in the stock market. If your friend says that XYZ Corp. is a good bet and your own fundamental analysis tells you that he is correct it is time to buy. Remember to always do your own fundamental analysis and remember that there is nothing wrong with getting out of the market when it does not make sense. Any number of long term successful investors sat on the sidelines when the Dot Com bubble burst or in the run-up to the 2008 market crash. You can too and then invest again when prices are low.