To make money on the financial markets, choosing the right assets is usually not enough. You also need to avoid stupid mistakes. “The majority of investors want to make high profits, but they don’t have a clear plan of how to get there,” warns CST Group, an Accounting and CPA in Firm Northern, VA.
When managing a financial portfolio, you need to be cool, calm and collected. Even if you make nice initial profits, you should always think about investments in the long run. Be as rational as possible, and stick to the original plan even when the going gets tough.
1. Create a plan according to your age
Ideally, you should create a financial plan according to your age. The general rule of thumb is that younger people should be more aggressive, while older investors should be more conservative. In other words, if you’re young, try to make as much money as possible on financial markets. If you’re a bit older and getting closer to retirement, don’t risk the money you’ve invested so far and take it easy.
Of course, this rule doesn’t always apply. There are older people who want to make extra money for their kids and are willing to take risks. Alternatively, there are young individuals with high salaries who just want to put their money to good use without taking unnecessary risks.
2. Know when it’s enough
One of the hardest things with investing, as with gambling, is stopping when you make enough money. The urge to make even more is so tempting that it can derail even the most conservative of investors.
You should always trust the initial financial analysis and your long-term plans when investing. Even if a stock performs well during a set period, you might want to consider selling it if there are signs of trouble. Keep in mind that you can always repurchase the asset once its price drops.
3. Thinking that things will remain the same
Thinking that you’ll make money in the future just because you made it in the past is pretty ludicrous. Everyone loses money on financial markets sooner than later. Whenever you lose or gain money, you should remain pragmatic and level-headed. So, even if you lose some value, that doesn’t mean you should sell all your assets and put money in the bank.
You should especially be careful when things seem overinflated. When everyone starts making money, this is often an indication that you should pull back. In the end, this is something we’ve seen prior to every financial crisis. Ideally, you should make a deep analysis of the economy as a whole. Major economic indicators should provide some insights into which direction the economy is trending.
4. Using confirmation bias to make decisions
Whether we like it or not, we’re affected by what other people think. This is especially dangerous if you’re an investor. For example, if you believe that something is going to happen despite the overwhelming evidence against it, there is a chance you’ll fall into the confirmation bias trap.
In these situations, people tend to look for information that would support their beliefs. Even the smallest things can be perceived as evidence in favor of our opinion. We are fast to jump to conclusions just to support our claim. This is why a proper financial analysis should have an advantage over anything, as a way of preventing us from doing dumb stuff.
5. Focusing too much on market timings
Every investor tries to buy assets when they’re low and sell them when they’re high. However, some individuals take this to the extreme. Although you should focus on market timings, you shouldn’t overdo it. Being a day trader has become very popular, but keep in mind that this is a very stressful job that requires a high level of involvement.
Instead of stressing too much about price fluctuation, it is much better to buy quality assets and just stick with them. That way, you will make a profit no matter what while saving all that energy for something better.
6. Neglecting the fees
Investors often get caught up in analyzing trends and trying to make money on small fluctuations that they forget to calculate the expenses.
Fees can easily eat up your profits if you’re not careful. An investor has to consider things such as commission fees, transaction fees, sales load fees, management, and administration fees, and expense ratio fees. These things tend to add up, and it is in your best interest to analyze a trader’s commissions before hiring the expert.