|Invest in What You Know|
There are many barriers keeping newer investors from making significant profits in the stock market. Often, a lack of knowledge in the expertise of trading will play a part in the lack of success. Emotions are another important factor. However, with practice and strategy, you can prove successful at investing.
The strategy, “buy what you know” certainly rings true when it comes to purchasing companies and sectors with which you are familiar. However, this adage also extends to your own trading style and personality.
The barriers to investment success can be any characteristic that holds you back. By understanding these barriers, you can remove them and be more successful. If you fail to overcome these barriers, you will see yourself making the same investment mistakes over and over again. These can be different for each investor, though there are some common ones.
Emotion often clouds an investor’s judgment. Fear and greed are common culprits, and these emotions lead many savvy investors into making poor investment decisions. All investors know that it is best to sell high and buy low. However, many investors are hesitant to sell their big winners or afraid to buy stocks that seem out of favor. When they hold onto a stock too long and it falls again, they are afraid to dump the shares, holding onto the hope that they will once again rise in value. They may also hold onto losing stocks until the company goes bankrupt. With their money tied up in losing stocks, they are not able to earn profits, and their portfolios continue to hemorrhage money.
The more you know, the more you profit
Lack of knowledge is also a big culprit in unsuccessful portfolios. There is much more to the stock market than buying low and selling high. You have to understand how the market functions, and what causes prices to go up or down. Other investors get too cocky and take unnecessary risks, which cloud their rational judgment.
Many of these investors will be drawn to strong performers, without even looking to see if the growth is sustainable. They also tend to put too much money into one investment, and they fail to diversify their portfolio sufficiently against risk. Or they may avoid certain types of investments, such as bonds, because they do not understand them. Knowledge equals money in the stock market, and the more you know, the better you can invest.
Zoom out your perspective
Another pitfall of new investors is that they fail to see the big picture. They make all of their investment decisions based on short-term goals and fail to think of the future. This makes it easier for them to be swayed by market fluctuations. They get overexcited when the market or a particular stock does well, and they panic if the market does poorly, making it difficult to make solid, profitable long term decisions.
Removing the barriers to your success
There are several strategies you can implement to remove the barriers that are keeping you from investing wisely: