(Maurie Backman)
Investing in stocks is a great way to build wealth, especially if you build a strong portfolio and leave it invested for many years. But if you are new to investing, it is easy to fall victim to certain pitfalls that could hurt you financially. Here are five that you should do your utmost to avoid.
1. Invest before you have a solid emergency fund
You never know when an unexpected bill or layoff might arise in your future. And so you need the money in the bank to make this possible – enough to cover three to six months of essential expenses.
It is important to have a solid emergency fund before you start investing. If you have no money in the bank and stock prices fall, you may have no choice but to liquidate your investments at a loss when the need for cash arises.
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2. Invest the money you might need for a short term goal
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As a general rule, you shouldn’t invest money in stocks that you think you’ll need within seven years. This is because the stock market can be volatile and it may take time to recover from a major crash.
If you’re looking to buy a home in the next three years, or if you’re spending the money to start a business in five years, you probably don’t want to go public. On the contrary, in this case, it is better to explore alternatives, such as bonds or bond ETFs, which may be less volatile.
3. Choose stocks at random
Without a crystal ball, it’s impossible to say for sure how different stocks will behave over time. A company that is in a strong financial position right now could disappear in 10 years, taking the value of your portfolio with it.
Still, there are steps you can take to research stocks and determine which stocks have the most value and growth potential. And it’s worth making the effort rather than picking stocks at random and hoping for the best.
4. Choose stocks because they are cheap
A low stock price does not make a stock a good buy, any more than a high stock price makes a stock a bad buy. Penny stocks, for example, are easy to acquire as they typically trade for less than $ 5 per share. But they can also be very speculative, which means that they are often riskier than stocks which are more expensive per share.
5. Let emotions guide your decisions
When you are new to investing, it can be difficult to watch your portfolio go down overnight due to movements in the market that are beyond your control. But remember, you don’t officially take losses in your portfolio until you sell investments for less than what you paid for them.
This is why it is important to keep your cool and avoid reacting when stock prices plummet. If you sit well and fend for yourself, you can avoid losses.
Likewise, don’t rush to sell stocks for a profit when their value increases. It could mean missing out on future earnings, not to mention exposing yourself to taxes you might not be prepared for.
If you haven’t started investing yet, the best time to start is right now. Just make sure to avoid these pitfalls as you navigate your portfolio building process.
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