Today, I discuss 2 common rookie mistakes everybody should avoid at all costs.
The markets are at all-time highs and they are flooded with novice investors. The number of individual investors in the market has doubled over the last decade, with much of that jump having occurred in 2020. In 2010, individual investors made up only 10% of U.S. equities trading volume. In 2019 this percentage rose steadily to 15% before reaching nearly 20% at the end of 2020.
One reason is the pandemic. While people People are stuck at home for of the last year they get bored. Now add in the growing popularity of commission-free trading on apps like Robinhood, stimulus checks and rate cuts.
It is great to see more people taking charge of their finances. But they have to recognize that we living in unusual times. We have reached the point of euphoria. And any experienced investor knows that euphoria is inevitably followed by anxiety, panic and despondency.
Mistake No. 1
One common mistake that investors make in overvalued markets like this one is to “buy high and sell low”. When all stocks are going up and all seems like a one way street, a highway to make easy money, Rookie investors buy into stocks at any price without doing their homework on the long-term growth prospects of the underlying business. That’s why, when the herd starts running in one direction, you need to take a hard look at your investments. Then it is time to either to take your profits or even better hold on to your solid, quality company and withstand the volatility. Because you know that when the dust settles, you’ll still have a stake in a solid company.
But the inexperienced retail investor sells exactly then they get nervous and panic/depression kicks in. The consequence is: they bought high and sold low. A bad recipe for investment disaster!
Mistake No. 2
Another common mistake the inexperienced investor makes is to be overexposed to one company or one sector. For example: just because thousands of Reddit users push a gaming retailer up, who is past its prime, don’t wager all your money on it. Overexposure is dangerous because it means you aren not properly sizing your positions and manage your risk. The right stock position size helps to avoid the total meltdown of your overall portfolio with a single trade. My basic rule is, never invest more than 5% of your portfolio in a single trade.
After all the hype, excitement and euphoria, my experience tells me, that the next wave of investor sentiment will be anxiety, then panic, depression and, eventually, hope again. That’s not rocket science, but this is just what the markets do.
Avoid these 2 market mistakes. Take the emotions out of the equation. And always do your homework.
Sven Franssen