They say financial markets have short memories, which is why they always seem to fall down the same holes. Rampant speculation, asset bubbles, too much debt… Shouldn’t we know better by now?
It’s a similar story for many individual investors. Time and time again, many of us get burnt by simple investing traps, like betting on the ‘next big thing’, ignoring data, buying high or selling low.
But take it from someone who’s learnt the ins and outs of the share market the hard way; it’s expensive, exhausting and a waste of time to learn your own lessons.
To help you avoid making some of the same mistakes I have, here are my biggest lessons from nine short years in the market.
1. Successful investing means doing your research
Charts and tricky technical indicators have their place, but never ignore the value of journalists, forums and fundamentals. Just because a stock looks over-sold or has been cycling around the same range for a while doesn’t mean it’ll turn the corner.
I jumped in to the debt saddled Babcock & Brown without giving the media due respect, and lost a small mint when the lenders came knocking. The papers said things were wobbly, while the charts said they’d swing back.
Things ended up like your granny’s chin – hairier than they should’ve been.
2. Only speculate in moderation
I’m from WA and, like a lot of red blooded sandgropers, love a punt on a long shot – especially when it’s clouded by optimism and obscene upside potential. Which, like a flutter on the Melbourne cup and a dip on the Brownlow, has its place… but only in moderation.
I learnt this lesson by giving a raft of speculative resource stocks undue weight in my portfolio. Marathon Resources, Apex Minerals, WHL Energy a few that spring to mind. Thankfully I came out relatively unscathed, with a few standouts offsetting the losses I copped, but gee, the old Commsec screen emitted a deep red glow for a while as I indulged my speculative side.
Having a few stock market punts is fine, but don’t make it the focus of your portfolio and only speculate with money you’re prepared to lose. Even if you’re from a mining town and think you know what’s what.
3. Take profits
Boy this lesson takes a while to learn. Watching gains whittle away in the hope they’ll creep back up is a painful process that’s avoided with two great tools. Stop loss orders and clear trading rules.
The first sells your shares when they retreat below a certain price, the second is about setting a level of profit, say 40%, and selling some shares when that buffer’s reached.
Failing to capture good gains when they’re on the table has happened many times. But trust me, it’s better to miss out on further profits than lose existing ones.
4. Balance beats stock picking, every time
When you start out in the share market, it’s often the case that you don’t have much money to play with. And this often means you buy a high concentration of stocks in one sector.
While it’s fun thinking to yourself, ‘well if this one or that one comes off, then wow’, it’s not a safe way to generate returns. So make the smart move and spread your assets.
I didn’t do this at the start – had gold coming out my ears. Or so I thought, until the gloss came off and share prices careered downhill. In hindsight, I would have been much better off diversifying my portfolio into other sectors instead of putting all my eggs into the golden basket.
One option for people who only have a little bit to invest is to look at a managed fund or index tracker, because if your little area of expertise implodes, so will your portfolio.
Got any share market pearls of your own to share? Let us know in the comments.
Image: Tambako The Jaguar, via Flickr