Avoiding the 6 Most Common Investing Pitfalls
The stock market is a scary place. It can seem like there's no way for you to make money without taking on risk and just hope that it pays off. But if you avoid the six most common investing pitfalls, your chances of success are much higher!
Because the investing industry encompasses so many distinct disciplines, skill sets, and financial instruments, there's plenty of room for error. Anyone who takes part as a private or professional practitioner faces numerous hurdles, constantly has to verify information, and must deal with multiple regulatory agencies along the way. Is there any way to completely avoid making a mistake?
Of course not, but there are several techniques that can maximize a person's chances of operating in a nearly error-free environment, or at least reducing the risk of loss to as low a level as possible. When it comes to retirement planning, trading stocks and bond, getting involved in the precious metals market, owning real estate, using options contracts, and building a portfolio of blue-chip shares, investors need to be on the lookout for common obstacles that are unique to each one of those particular categories.
Fortunately, many of the myths about day trading have been dispelled during the past decade. Still, a few pernicious ones remain, and they can wreak havoc with even the most experienced financial professionals. First among them is that day-trading is only for the wealthy. In fact, many online brokerage firms now offer people of all income levels the chance to day trade.
Misconceptions about the PTD (pattern day-trade rule) thrive. The rule essentially states that anyone who transacts more than three round-trip trades in a given five-day business period falls under purview of the regulation and must maintain an account balance of $25,000. However, the rule only applies to margin accounts, and it can be avoided by opening several accounts (and making three round-trips in each one) or simply using a cash only system for buying and selling shares.
The most frequent mistake people make when opening a retirement account is not adding to it regularly. A related error is assuming that post-retirement tax rates will be lower than they are now. For young adults just out of school, that's often not true. Roth IRAs, which use after-tax money and offer no deduction, are usually a better bet for young working adults. Likewise, ignoring the advantages of self-directed IRAs, ones that can hold physical assets like gold and silver, is a financial sin of omission that can keep investors from obtaining the highest level of protection for retirement savings. Precious metals often act as a hedge against inflation and dire economic upheavals.
As noted above, there are unique advantages of keeping at least a portion of a retirement portfolio in metals. However, it's easy to assume that is a little is good, then a lot is better. Unfortunately, many people who plan their retirement without expert guidance tend to overload their nest eggs with precious metals. In most instances, it's wise to keep the metals' portion of a retirement account around the 10 percent mark, even when gold and silver are undergoing rallies. Metal prices are hard to predict and do not always travel in a directly opposite direction of the stock market.
There's a truism about real estate never declining in value. The myth began as in the long-term, land does not decrease in price, which is a bit closer to being true, but still misses the mark. The truth is that, in today's complex financial environment, real estate is just another place to park money, for the long-term or short-term. Sometimes the sector performs well, and sometimes it doesn't. What's the pitfall? It's believing that there's some magic spell on real estate investments that makes them immune to the ups and downs of the general economy.
The misconception about options is that it's easy to learn to trade them, and it's anything but. Anyone who wishes to get involved with using options as a hedge against share holdings, or as a way to earn a profit trading the contracts themselves, should seek help from a professional who specializes in buying and selling options.
Blue Chip Stocks
The common misconception about blue-chips, shares of top companies that make up the major indices, is that they are a sure bet. To the contrary, in a declining market, some or all blue-chips can decline in price, reduce payout of dividends (if they pay them at all), and lose significant value. A quick look at recent history reveals that these high-end shares often fall off the indices after poor management decisions and financial problems of various kinds.
For anyone assembling a portfolio of blue-chip shares, it's important to do in-depth fundamental and technical research in order to identify companies that are among the healthiest in the category. Don't fall into the mindset that a strong, powerful, profitable corporation will never change. There are no guarantees in life, but it is possible to maximize the probability of making successful investments in many different niches. Taking time to learn about the most common mistakes is the most efficient way of forging ahead with confidence.
In conclusion, the investing industry is a complex and ever-changing environment. And while no one can completely avoid making mistakes, there are plenty of steps that investors can take to minimize risk and increase their chances for success. Remember to never invest more than you are willing to lose.