Now that you have decided to invest your extra funds, you may be envisioning incredible profits. Many investors have benefited from life-changing success from their efforts, but the reality is that many others have experienced serious financial distress because of poor investment decisions.
With this in mind, it makes sense to learn more about what to expect and to prepare yourself for the experiences ahead of you.
1- Fund Your Savings Account First
Many first-time investors use their stock market account as a piggybank. All extra funds are used to purchase stocks and other investments, and little money is available for immediate use in an emergency situation. Unexpected events occur from time to time, and they often are associated with unplanned expenses.
These may include an illness that results in expensive medical bills, a car accident that requires you to pay an insurance deductible and more. When you are forced to sell your investments at a moment’s notice, there is a chance that you may need to sell them for a loss. The simple way to avoid being in this situation is to fund a savings account with a healthy sum of money before purchasing any investments.
2- Only Invest What You Can Afford to Lose
The price of a stock could skyrocket, or it could plummet. While major price fluctuations are uncommon for stocks that have been well-researched and selected with care, the risk of losing most or all of the funds invested is always present.
If this happens with funds that you cannot afford to lose, you may experience extreme financial hardship. Diversifying your portfolio may help you to mitigate the risk of significant loss.
3- Trust the Experts
As a new investor, you may be willing to jump on the bandwagon and purchase the stocks that your friends and neighbors have already profited from. The problem with this strategy is that you may be purchasing the stock at its peak price rather than at a low point, and buying high often results in loss.
A better strategy is to research big stocks to buy now rather than to rely on tips from friends. You should also learn more about the fundamentals for stock analysis to back up the tips that you receive from experts. You work hard for your money, and investing it without understanding what you are buying into is a major gamble.
4- Avoid Making Emotional Decisions
One of the most common mistakes that new and experienced investors make involves letting emotions guide their decisions. When you see the price of one of your investments skyrocketing, you may be so excited about the perception of a profit that you are inclined to buy more of that stock as the price edges to higher levels.
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On the other hand, when the price of one your picks is plummeting, you may immediately feel stressed about the perception of financial loss. These types of emotion-driven decisions can ultimately cost you a fortune. Buying and selling investments without carefully reviewing the fundamentals is not advisable.
Keep in mind that the profit or loss is not realized until you have sold the investment. Because of this, selling for a loss locks you into that loss. The alternative is to hold onto the stock until the price rebounds. Your analysis of the fundamentals will help you to make an informed decision.
5- Balance Your Portfolio
Your new investment account will initially include only one or a few stocks, so diversifying your portfolio on day one is not reasonable for most investments. As you contribute more funds, pay attention to the overall risk of your investments as well as to their performance. You can mitigate the risk of stock investments with mutual funds, CDs, bonds and other vehicles.
You also should work toward balancing your portfolio across various sectors. Some sectors are hotter than others at any given time, so you may need to find a comfortable allocation that yields superior profits. However, if your portfolio is too heavily weighted in one sector, you may be unintentionally exposing yourself to risk.
The Bottom Line
While you may see dollar signs as you begin investing, it is important to set aside unrealistic expectations. Instead, develop a reasonable strategy that takes these tips into account. Proceed slowly so that you can learn as you go without potentially losing a substantial amount of money.