Warren Buffet’s first rule of investing is to never lose money. His second rule? Never forget the first. Unfortunately, a lot of investors aren’t very good at following his lead. Here are just a selection of ways you can lose money over the next year.
Fail to research companies
Buying a fast-moving share can often result in disaster if you have no idea why it has gone up and — more importantly — what will need to happen for it to keep rising. Buying blind is akin to gambling.
As well as taking an appropriate amount of time to understand a company, it’s also important to stay balanced when evaluating its prospects. No business is perfect. Those who close their ears to dissenting views run the risk of becoming too attached to their shares.
Trade, don’t invest
As anyone with a passing interest in investment will know, stock market movements over the short term are very unpredictable. Sure, we can all take a stab at where the FTSE 100 index or Company X’s share price will be next month, but the simple fact is that no one knows with absolute certainty. This won’t stop some from attempting to gain quick profits from trading, of course. If you can do this consistently, then I tip my hat to you. Most people can’t.
At the Fool, we’re big fans of building wealth slowly. Although investing horizons will vary from person to person, we think it’s best to judge stocks — and overall performance — over years rather than minutes. If you want excitement, stay away from the market.
Obsess over your portfolio
How often do you look at your portfolio? Once a month? Once a day? Every 10 minutes? While checking your investments every so often is prudent, fixating on every 1% rise or fall is both unnecessary and makes it less likely that you’ll stick with great companies.
So long as you rigorously researched your investments before buying them and your holdings are sufficiently diversified, there should be no need to watch their progress every hour. Switch off and move on.
Fail to consider ISAs
One of the best decisions you can take in investing can be made before purchasing a single share. By opening a stocks and shares ISA (as opposed to a regular account), you can ensure that any profits you make will be shielded from capital gains tax. Given the wonders of compounding, this can save you thousands — even millions — of pounds over several decades of investing, especially as the ISA allowance will rise to £20,000 from April.
Responding impulsively to macroeconomic shocks or political surprises isn’t recommended. For evidence of this, think back to how markets reacted to last year’s referendum vote and Donald Trump’s still-somewhat-unbelievable election win. Within hours of the UK deciding to leave the EU, stocks tanked. Those who sold their shares out of fear that we were on the highway to economic armageddon missed out on the massive rally that followed, particularly in many FTSE 100 stocks that benefitted from the fall in sterling. Similarly, those who dumped stocks in November as we struggled to comprehend Trump’s victory will have missed out on the markets rising ever since.
Successful investing doesn’t mean becoming robotic but it can mean staying away from your portfolio until the outlook becomes clearer.
Learning the identity of your greatest adversary is one of biggest challenges in investing. It's not other private investors, day traders or the big institutions. Rather, it's likely to be the very person staring back at you in the mirror.
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