At the start of my GCSE’s I had no idea as to the specific job I wanted to do, I just knew I wanted it to be in finance, so in conjunction with schoolwork, I set up my own virtual Forex trading account to gain experience in the financial markets and gain experience in the investment world. However, despite watching 1987’s Wall Street, I was almost hopelessly out of my depth. However, from these failings, I learned from my mistakes and was able to have a firm grasp on the financial markets by the start of my 6th form and was able to comfortably manage my portfolio to the current day. So, here are the five most important lessons I learned that stopped me making schoolboy errors.
Research is vital in understanding any business and, if you understand the business, you can understand its share price. Most starting investors do know this but slip up when it comes to the level and depth of research needed. For example, researching short-term trends when reading-up on momentum stocks and getting to grips with long-term business plans and future profits prospects when looking up possible growth stocks are just two ways in which rookie investors can trip up – looking at the long-term view instead of momentum can lead to huge opportunity costs. Furthermore, building up a wealth of knowledge surrounding various industries and firms is only valuable for an individual’s long-term investment prospects. But don’t trust all research or all those who have researched. Just because someone has researched doesn’t mean they’re correct – that included you – so build up a network of experience with your research and over time it will become easier to find opportunities.
2. Jumping on the band wagon
Buy low and sell high, it’s not rocket science but is still a mistake that many investors tend to make. Although true that a rising stock market does build confidence and it could be disheartening to see others gaining where you haven’t invested but that shouldn’t matter – unless you only care about momentum. Buying at the top limits returns and, in some cases, can lead to significant losses if you’ve stumbled into a price bubble – shown in the dot-com bubble bursting of 2001. If you’ve done your research you should have faith in it therefore be able to put any fear aside before the bandwagon has arrived.
3. Goldilocks’s patience
When I first started an investment portfolio I often made the mistake of cashing in on my winners and reinvesting in other areas. Although this was sometimes successful, it meant that I wasn’t reaching my full potential. “Let your winners run” is a common strategy that has benefitted many of the world’s largest investors and many of the world’s smallest investors. Also, if you believe that a stock will rise because of solid information and reading you’ve made, don’t be scared to hang on in and prove other investors wrong. But this can’t go without warning. Clinging on to shares you believe to be good can have adverse effects on your portfolio, if a stock is still diverging from where you expect it too, reassess your analysis and conclude again – don’t make the mistake of believing you’re always correct. Have the ability to let go of a stock, but at the right time.
4. Don’t obsesses
As previously mentioned, following momentum stocks for the short term can be productive and can yield some profits, but can lead to obsession. Sometimes embrace the power of doing as little as possible by balancing your portfolio with some long-term growth stocks or some high dividend assets that allow you to be able to rest, have a day off and be able to get on with your life without the need to check your account balance or your charts every hour. This is especially key, if – like many fresh investors – you are doing this in your own time as an alternative to letting your money stagnate in a bank. Don’t believe me? Check the Kay Review (2012) which gives evidence that solely focusing on short-term trend following rarely leads to long-term gains.
You spent 16 (or more) years in education to get a job so what makes you think you can spend 10 minutes reading an article and be able to judge the markets perfectly? The truth is that trial by error is still the greatest way to improve your ability. There are lots of virtual-money trading platforms you can use to get to grips with the financial markets and they are of more use than anything if you are thinking about learning to trade. From allowing you to get a routine of research going with reputed and trusted sources to finding your patience levels and showing you the level of risk you are willing to take, a practice account is the perfect preparation to real-life investing and stops hard earned cash being thrown away due to rookie mistakes.
Finally, the most important rule for any investor is to learn from your errors (or in this case – mine). It may take time for you to progress to making any money but as long as you continuously improve you should get there. And if there’s one thing you take away from this, I hope it’s the value of research. It underpins everything in an investment and is the single greatest tool in your arsenal, so use it.