New research reveals beginner investors often make big mistakes when first dabbling in the stock market. So, what are these common mistakes? And what can be learned from them? Let’s take a look.
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What big investing mistakes do new investors make?
According to Barclays, two big investing mistakes beginner investors make are acting on impulse and being led by personal emotions.
Barclays came to this conclusion by asking 2,000 people about their investing decisions. According to its survey results, exactly half of the respondents said they’ve made an impulsive investing decision. Meanwhile, 67% of this group said they went on to regret the decision.
The research also revealed that impulse investing was often driven by emotions. That’s because the research also showed that 32% of beginner investors made investing decisions due to social media. Interestingly, almost the same number (31%) said they were influenced by friends.
Interestingly, 30% of beginner investors admitted they had made an impulse investing decision based on the fear of missing out (FOMO). In other words, newbie investors were fearful of missing out on big gains if they decided not to invest in a particular stock. This FOMO phenomenon is commonly associated with cryptocurrency due to the fact that digital currency is such a volatile asset.
More widely, Barclays’ research also highlighted how over a third (34%) of beginner investors made an impulse investing decision as a result of being ‘excited’. Meanwhile, 21% had made such a decision due to feeling ‘impatient’ and 16% made an investment decision out of ‘fear’.
What else did the research reveal?
Nearly half (47%) of the survey respondents said they often feel anxious about their investments. In contrast, 66% revealed they have a sense of excitement when checking the performance of their investments.
The research also highlighted how 62% of respondents said they needed to keep a close eye on their investments to consider themselves successful.
According to Rob Smith, head of behavioural finance at Barclays Wealth & Investments, being led by emotions can lead to clouded judgement among beginner investors. He explains, “Feeling an emotional connection to your investments doesn’t always have to be a bad thing, especially if you use it as a tool to invest in funds you feel passionate about.
“However, when your feelings start to cloud your decision making, it’s time to take a step back. By understanding your emotions, it’s easier to manage them and create a diversified portfolio that can not only take advantage of market opportunities but also weather any storms.”
Smith also suggested that investing mostly in assets that are “stable and less exciting” may be a better strategy. Despite this, he suggests that investors who enjoy the thrill of investing may still wish to deposit smaller sums in more volatile assets.
He explains, “It’s understandable that many investors enjoy the thrill and excitement of investing. One compromise investors can make is the ‘core-satellite approach’. Investors may want to put their money into something stable and less exciting, and then add a small, satellite component of investments that gives them more enjoyment, keeps them engaged and gives them an emotional reward – but without causing investors to make any decisions they may regret.”
Why is being led by emotions a bad thing?
Investors who make investment decisions based on impulse or emotions are at greater risk of losing money. That’s because ‘exciting’ and often highly volatile assets are likely to experience big short-term swings in value. This makes it relatively easy to lose wealth, especially for stock market newbies.
On a similar note, investors prone to emotional investing may make knee-jerk reactions to falling share prices. In contrast, a rational, long-term investor will understand that stocks can both rise and fall. As a result, this type of investor is more likely to witness their portfolio ride out any short-term dips.
If you are a beginner investor, you can avoid making other common mistakes by reading The Motley Fool’s investing basics guide.
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