As the geopolitical situation in Eastern Europe continues to deteriorate, we should prepare for further market headwinds in the coming months. Whilst more experienced investors may welcome some market volatility, it can be unsettling for newbie investors. In times of uncertainty, people who are new to investing are more likely to make mistakes that will cost them dearly in the process. Here I look at three mistakes to avoid in 2022 if you are just starting to invest in the stock market.
1. Buying a stock you don’t understand
This is one of the cardinal sins of investing, and it’s a mistake you should aim to avoid at all costs. As author and fund manager Peter Lynch said, “If you can’t explain why you own a company in two minutes or less to a ten-year-old, you shouldn’t own it.”
If you buy shares in a company you know little of, you are essentially gambling. Taking a chance on whether a business will go up or down in value is a formula for disaster. Why risk your capital on simply a chance?
You would be a lot better off sticking to businesses and industries you are familiar with. Where possible, you should consider diversifying your portfolio and investing long term. By spreading your portfolio across different geographies and investments, you have a higher chance of riding out any market headwinds and making some sweet returns.
2. Losing your composure in a market sell-off
Some investors know from experience that market corrections of at least 10% are part of the game. To be more precise, since the late 1920s, we’ve seen a market correction every 19 months, on average. The latest one was the 34% market plunge at the beginning of the Covid-19 pandemic in early 2020. Since then the market has steadily recovered, prompting analysts to think that another correction is likely soon.
However, even if that happens and it results in a frantic sell-off, you should aim to remain calm. Ignore the panic selling and focus on businesses with strong fundamentals and your long-term goals. It often happens that those who ride out the corrections see the market rise to new highs.
3. Investing everything in crypto
Financial news is full of unimaginable gains from the crypto world. For example, in 2021 alone the Shiba Inu token posted a staggering return of 43 million per cent. The promise of such returns would understandably draw junior investors to the world of crypto investing.
Investing a marginal portion (less than 5%) of your portfolio won’t break the bank in case things go south. However, you take on excessive risk if you essentially place all of your eggs in the same basket. This is definitely a mistake you should aim to avoid. The crypto market is extremely volatile and seemingly spectacular returns can disappear just as quickly.
The bottom line
In the end, we should all remember that investing mistakes are part of the process. But it’s important to learn from the mistakes of others to avoid them and be a better investor.
Develop a systemic approach that focuses on long-term investment with a diversified portfolio and stick with it. It will help you spot these and mistakes also avoid them in the process. A good way to keep your adventurous side in check is to keep some ‘fun money’ aside that you are prepared to lose. This way, you can experiment and take risks without gambling the bulk of your capital.
If you do your due diligence and stay focused on your long-term goals, you’ll be one step closer to avoiding these mistakes and making some sweet returns.
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