Investors today are able to choose from a diverse range of trading markets and options, but that doesn’t mean they won’t have to negotiate a few problems that either need to be avoided or fixed, if you are going to be successful in the stock market.
Getting hold of new information relayed by Money Morning is one issue that you won’t have to worry about, but here are some of the common issues and problems that sometimes have to be addressed as an active investor.
Stay in your comfort zone
One of the many pearls of wisdom provided by the renowned investor Warren Buffett, is that you should exercise caution when considering investing in a business that you don’t fully understand.
It can make a substantial difference to your investment returns as well as your anxiety levels, when you consider investing in companies where you are able to enjoy a good level of comprehension as to what the business model is and what their target market is.
A good case in point, would be to try and get a handle on a biotech stock and investing when you don’t quite grasp exactly what the business is all about and how they are likely to outperform their current stock valuation.
Buying individual stocks can leave you exposed to a greater level of risk than you might actually be comfortable with. It might therefore be a better approach to consider investing in a diversified portfolio through an investment vehicle like an ETF or a mutual fund for example, so that you can cover any gaps in your knowledge and spread the risk.
Costs can eat away at your profits
If you are a very active investor who likes to trade frequently, a particular downside to this approach is that you could erode a fair percentage of your profits as a result of transaction costs.
Too much investment turnover can cost you dearly and unless you can negotiate extremely low commission rates that are in line with fees that institutional investors enjoy, there is every chance that a high level of trading activity could have a detrimental impact on your profits.
The other key point to bear in mind about high levels of trading turnover is that in addition to the high level of transaction costs, there is always the possibility that you may well be missing out on a greater level of profitability, if the stocks turn out to make long-term gains that are greater than the gains that you made by buying and selling within a short space of time.
Not exactly a great personality trait to witness in a person, but in the context of investing, emotions are a big problem for far too many investors.
It is often stated that fear and greed tend to rule over financial markets and you can certainly witness both of those emotions being applied by some investors on a daily basis. One of the biggest problems that many investors struggle with is trying to keep control of their emotions and not letting rule of your financial actions and transactions.
Fear drives markets downwards and can make you consider heading for the exit yourself, and greed can also be a big issue when it drives you to chase prices that turn out to be unsustainable.
Always try to remain emotionally detached when it comes to investing and let logic and common sense play their part, rather than being driven by emotions that could easily derail your investment returns.
Failure to plan
It is always good to have direction and purpose, and this is certainly a good way to approach investing with.
Having a plan and a set of targets to work towards will often help you to avoid some of the common mistakes made by investors, which can occur when you don’t have a specific plan or strategy in place.
It is never a great idea to take a scattergun approach to investing. Picking stocks at random and without any specific philosophy or reasoning behind your decision, will leave you exposed to inconsistency and will often mean that you don’t get as good a return on your investments as you might do when you have a plan that you are executing.
Having a trading plan also instills a reasonable level of discipline into your trading decisions, so it is always worth remembering that old business adage of if you fail to plan, you plan to fail.
Benjamin Watt works in investment banking and enjoys using his knowledge to write interesting and informative articles which get published at finance and investment blogs.
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