Stock Market Dos and Don’ts
Investing in the stock market is indeed not a piece of cake. People generally take a lot of time before being comfortable with with their investment strategies.
Therefore, Stock investors might generally find their emotions being in a rollercoaster ride with the fluctuations in the stock market. With the stock market inching upwards, they generally breathe a sigh of relief whereas they might feel fearful as the market starts going down again – if you too are one of them, it is suggested to you to evaluate your risk tolerance.
In Layman’s terms, you can stomach volatility in the value of the portfolio that you own. Since it is the root cause of problematic investment decisions, this part quite matters.
Since it is impossible to accurately predict with certainty whether a bear market will emerge or lower stock prices will be short-lived, the current volatility is the test that is most likely to determine the wherewithal of investors. In fact, many financial advisors also talk about risk tolerance as a function of emotional response to the fluctuations in the market.
Hence, the best way to go about this problem is by making investment decisions at the time when you are not overwhelmed by extreme emotions. Write down a well-versed plan and prepare your mind beforehand on how you will react if there is a rise or drop in the stock market. In case of a crash, you may simply take a look at your written points and remind yourself whether your reaction to the situation is in accordance with your previous expectations.
‘The Little Book of Common Investing’ by John C. Bogle warns against giving too much attention to the ‘expectation market’ and refraining from making the market’s direction. The marketing head of EduMagnate – Ms. Rose Black also highly recommends giving this book a read, as her journey in the world of the stock market was influenced a lot by it, eventually making her realize a good amount of mistakes she had been subconsciously making.
Given below is a simple list of Dos and Don’ts that might help you make smarter decisions and eliminate the chances of going through an emotional breakdown altogether by being cautious from the very beginning.
DO GOOD RESEARCH
Before making any hasty decisions. Smart and strategic investments are considered to be the key to success. In case the trading fees is more than 2%, do not go for it. Also, be aware of the news and what is happening around you in different industries, because each sector of the economy – from industrial to healthcare – plays a major role in affecting the performance of stocks. For better guidance, taking help from your brokerage is also advisable.
DO INVEST CONSISTENTLY
Even if you feel hesitant to do so. It is a fact that people generally enter the market when it is doing well and start believing that the indexes will touch new highs. However, things can be reversed as the bull market has equal chances of going down, making your investments non-profitable. Moreover, refrain from investing for only a short period of time, say one year. If you wish to make good money from the market, investing periodically and consistently is highly advisable.
DO DIVERSIFY YOUR PORTFOLIO
Going with the saying – ‘Do not put all eggs in one basket’, it is quite understood that lower the number of stocks invested at, higher will be the risk. Therefore, to eliminate this risk factor that might ultimately result in you getting stressed, you must sufficiently diversify your portfolio. In case even two or three stocks start to perform poorly among the 10+ stocks you have invested in, your portfolio might not get affected much.
DO INVEST ONLY THE SURPLUS AMOUNT YOU HOLD
Since the stock market offers you the golden opportunity of investing in your favorite companies and making profits, one must go for it! However, no matter how tempting it might look, you need to sort out your budget and finances and then invest wisely. Since the fluctuations are uncertain the risk factor is huge – it is advisable to invest only the surplus money which doesn’t affect your lifestyle and make you feel regretful in the future in case you lose money.
DO HAVE PATIENCE AND INVEST IN LONG TERM
The reasons behind the success of most stock traders are their long-term investment plans as well as their patience skills. The reason why long term investments turn out to be fruitful is because of the compounding factor, also called the eighth wonder of the world. It is a fact that long term investments are ALWAYS profitable.
Since patience plays a key role in investment, one must keep in mind that instead of hastily making decisions and selling your stocks, one must not sell one’s stocks too soon for the sake of short-term gratification.
DON’T HAVE UNREALISTIC EXPECTATIONS
One of the main reasons for stress that is faced by a major chunk of investors is having unrealistic expectations which leads to performance pressure. Yes, it is true that there are various stock traders who have gotten lucky by making 500%+ returns, however, the number of these investors is very less and the news about them only gets highlighted. It is to be understood that a return between 12%-18% in a year is considered to be good enough in the market. Plus, after compounding this return over years, higher returns on your saving accounts are guaranteed.
To compare your profits with others is another toxic thing to do. You might not be knowing how long it must have taken to acquire the skill set for a person. With knowledge, practice, and experience, you can also get similar returns.
DON’T FOLLOW THE HERD
Be confident of your research and knowledge and make rational decisions accordingly. You will come across people suggesting to you very convincingly about one stock being great and asking you to buy it. But your knowledge doesn’t agree with the suggestion. IN such cases, there is no point in reconsidering but trusting your instincts. This is one golden rule to keep in mind if you are serious about your investment plans.
DON’T TAKE EMOTIONAL DECISIONS
Training your mind to be unaffected by internal and external decisions that can affect your investment choices is a must. Yes, it is true that this skill cannot be mastered at, but is necessary to be worked at its best. It is of no use of getting emotional, be it because of your previous failed investment choices or a company-related matter. Optimism is the key here. If you believe that a particular company has a bright future and trust your intuition, do not overthink and invest as per the wish of your rational mind.
DON’T BE A VICTIM TO PSYCHOLOGICAL TRAPS
Communication biases, buyer’s remorse, superiority traps, communication biases, etc – the list of biases and traps that can be fatal for gullible fatal is endless.
Most of these traps are difficult to notice by individuals because of being professionally designed to deceive the human brain, hence having knowledge of these biases is a must to avoid serious damages. As a habit, it is not difficult to spot these traps through practice, experience, and efforts.
DON’T TRUST FREE TIPS AND RECOMMENDATIONS BLINDLY
Beware of the BUY and SELL messages you receive once you open your trading account as they can be scams as no individual would give a stranger tip for free! Hence, no matter how appealing or convincing some recommendations might look, do not invest blindly on the basis of them.
These points do not work at all times, it is through an individual’s journey and experiences with the kind of stocks that he/she invests in that makes them decide what are the relevant steps that are supposed to be taken.
Therefore, instead of stressing over every little thing – learn from every experience of yours as this is what will be making you successful in the future!