Avoid these crucial mistakes by first-time investors

4 Minute Read

Questions

 

How are first-time investors different from experienced investors?

There is a reason that car insurance is more expensive for first-time drivers. The risk and therefore the premiums are higher because it is easier for an inexperienced driver to get themselves in trouble very quickly.

Without the experience of making losses and gains across a broad range of investment options and over a sustained period of time, inexperienced investors can potentially invest in the wrong asset class at the wrong time, or sell up and make a loss.

Experienced investors are more likely to make an informed choice, demonstrate patience and make higher risk decisions when it makes sense to do so. Just like an experienced driver, they are far less likely to make a costly or dangerous mistake.

 

What are the most common mistakes that first-time investors make? 

The most common mistake we see with first-time investors is they can have a higher propensity to invest on emotion – excitement, fear, anxiety or ego – rather than with logic and fact. They may also not understand their tolerance for risk and their time horizon for investment.

For example, they may try to day trade without really understanding the companies or the markets they are investing in. They may buy high and sell low if they lose confidence. And they may not understand certain trends in the market and become over-confident.

All investors should have a clear understanding of the type of investor they are. This is a basic starting point that will guide first time investors.

 

What are the most expensive mistakes that they make?

An individual needs to decide what types of investment they understand and are therefore comfortable to invest in. The most expensive mistakes are made when people don’t comprehend the underlying risk they are taking on or when they accelerate their risk through leverage (borrowing in order to invest), for example through margin lending. Taking on more risk may not be appropriate. However, if you are taking on risk that you really do not understand then it will most likely be the wrong thing to do.

 

What are the most common mistakes they make when buying shares ...

You need to understand the company, industry or market of the share you’re investing in. If you’re buying stocks in a technology company and you don’t understand their financial position, their products and intellectual property, the amount they invest in R&D, and the markets they operate in, then why are you buying them a share in their future value? The performance a company has achieved in the past is no predictor of how they might perform in the future, and the business world is changing faster than it ever has.

 

... and selling shares?

The same mistakes can be made when selling shares, in that you allow emotion to override logic. The market will often swing up and down more wildly because of emotion rather than underlying fundamentals. That creates risk both when share prices are increasing, and when they are falling, providing the opportunity for more mistakes by investors. Is the drop in price an opportunity to buy more or should you sell? Your knowledge and research will inform you.

 

How can they make sure they buy shares appropriate to their risk profile?

An individual needs to decide what type of investor they are and the basis upon which they will make decisions to buy, hold or sell.

If you really want to understand your risk profile and tolerance, and your horizon for investing, there are tools online or you can seek help from a professional advisor.

Knowledge and research will help an investor decide if a particular share fits their risk profile. Most share trading platforms will provide a variety of factual information, knowledge, charting and insights that will help an investor know more about the shares they may wish to invest in.

The more you know, the better your chance to grow.

 

What should first-time investors do if they make a really bad (i.e. costly) mistake?

The first thing you should do is accept the loss and deal with the negative emotions this will undoubtedly create. The investor should then understand how their decisions led to that outcome, and how that could be avoided in the future. The vast majority of successful investors have made mistakes, and ultimately this will increase your experience and knowledge of the market. It is important to understand that this is now a sunk cost and you have to move on with your new understanding of investments.