Market Overview

10 Rookie Mistakes New Investors Should Avoid

10 Rookie Mistakes New Investors Should Avoid

A flood of first-time investors have poured into the stock market this year. While it’s always a great time to get started investing, Wall Street can have a very steep and costly learning curve for inexperienced traders.

DataTrek Research co-founder Nicholas Colas recently put together this list of common rookie investing mistakes that new investors should try to avoid:

  1. Reacting to the market in real time. Making decisions about when and what to buy and sell in the market is difficult enough in a vacuum, but trying to plan an entry or exit strategy in the heat of an emotional trending session is a recipe for disaster.
  2. Attempting to “buy low and sell high.” While buying high-quality stocks at a discount is a sound long-term strategy, stocks making new 52-week or multi-year lows are often trading at those levels for good reason.
  3. Assuming stocks and sectors are trading up or down simply because of market noise. The reason for price action in the market may not always be obvious and it may be completely unrelated to a company’s business, but there’s always a reason for a big move in a stock.
  4. Ascribing too much importance to valuation metrics. Metrics like PE ratio are helpful in putting a stock’s current share price in perspective, but they do not give investors an edge because they are easily accessible, public information.
  5. Expecting fair play from policymakers. Governments and central banks have never hesitated to rewrite laws and rules in the interest of stabilizing the economy, including this year’s unprecedented $2 trillion CARES Act U.S. stimulus package.
  6. Predicting a catastrophic end to financial markets. The Great Depression and the 2008 financial crisis are two examples of times investors were fearful of an end to the global financial system, but market crashes have historically been some of the next long-term entry points for investors.
  7. Assuming stocks move simply on fundamentals. Fundamentals definitely play a role in market price action over time, but investors tend to care little about fundamentals during emotional periods of the market cycle, such as near market tops and bottoms.
  8. Data mining timeframes. The SPDR S&P 500 ETF Trust (NYSE: SPY) is up 18% in the past three months but only up 0.1% in the past six months. When analyzing an investment from a historical perspective, Colas recommends looking back in time as long as you plan on holding the stock in the future.
  9. Sizing investment ideas inappropriately. It’s intuitive that putting too much money into one stock creates a large amount of risk, but some rookie investors may not realize that too many small investments in highly correlated stocks can create a sneaky high amount of risk as well.
  10. Assuming you will never make any rookie mistakes. Even Warren Buffett has made plenty of investing mistakes over the years, and Colas himself says he is still learning after more than 30 years on the job.

“The craft of investing is not one anyone really masters; the best goal may well be to just make fewer mistakes,” Colas concluded.

Benzinga’s Take: New investors should expect to make mistakes when they first start learning about the market, but the key is to manage risk appropriately so that none of those mistakes are too costly to recover from.

You wouldn’t expect to pick up a golf club for the first time and be on the PGA tour after just a couple of weeks at the driving range, so remember to think about early investing mistakes and struggles as valuable lessons and part of an education that can pay off for a lifetime if you stick with it.

Related Links:

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