When it comes to investing in stocks and other financial instruments, below are some of the common traps that every wealth-building ninja should know about. Specifically, this article will cover traps such as sticking with investments too long, getting the wrong advice, not doing the appropriate research, and more. After reading and understanding these traps, you’ll know what has to be done to keep from losing your shirt.
Trap 1. Sticking with a failing investment too long
It’s easy to get emotionally involved with a particular investment. Maybe someone tells you that it’s a sure thing. Of course, when it comes to investing in stocks and other investments, there’s no such thing as a “sure thing”.
But what happens is that many people fail to accept that their stock pick is a loser. So they hold on to it and watch it go down, down, down. The result of being prideful results in even bigger losses. And it could take years for a stock to recover. Or, it could never bounce back,
When it comes to investing, you have to take emotion out of the situation. Right up front, you should establish the maximum percentage you would allow the stock to drop before bailing out. Let’s say that a 20% loss is your threshold. If that happen, take your lumps and move on.
Trap 2. Solely relying on the advice of the person who suggested the investment
Have you ever gotten a hot tip from a stock broker or someone else about an investment? But then six months later discover that the price of the stock has dropped 30%?
What a lot of people do is to go back to the same person who made the suggestion and ask them what they should do. That person might reassure them or make another suggestion.
It’s simply not a good idea to rely on the words of the person who gave you the bad advice to begin with. Misery absolutely loves company, but there’s no value in drowning your sorrows with that person.
Instead, you should seek out objective advice from a trusted source or two and then make a smart decision.
Trap 3. Taking advice from friends and family
There are a lot of armchair financial advisors out there. Some of them may include your friends and family. And actually, I don’t think it’s a big deal to listen to what they have to say. The problem that can arise is when you start relying solely on their advice.
The truth is your friends and family probably aren’t financial experts who are well versed in every area of investing. So only listen to these people to the extent that they have shown to be an expert in some particular area.
Trap 4. Burying your head in the sand
So what do you do when see that your stock is slowly plummeting day by day? Sell it, keep it, buy more?
When it comes to investing, the worst position that you can put yourself in is one of doing nothing because you don’t have a clue of how to proceed.
That’s why you must have a plan in place for dealing with bad investment situations. Don’t allow the decision to be made for you.
Trap 5. Being incurious
Many people hear about an investment or the stock market and immediately make decisions based on that limited information. This is not a smart approach to investing. Just because you hear something from one source, that doesn’t mean it’s completely accurate.
So before rushing to judgment, take a deep breath, and seek out other independent sources to confirm what you’ve heard. An open mind is a curious mind.
Trap 6. Overestimating your investment skills
A lot of people think they are financial experts. They might have busy jobs, families activities going on, and more, but they will swear that they can pick a winning investment from a mile away.
The reality is that a true investments expert is someone who spends hours and days pouring over mountains of information. In addition, they’ll know things about a particular investment that the average person has no knowledge of.
That’s why I always suggest that you only invest in things you understand. Maybe you think you know all about derivatives and credit default swaps. But, seriously, is that a risk you really want to take?
Now that you’re aware of the investment traps discussed above, the next time you’re making a decision about an investment you’ll know what to do. Specifically, you’ll know when to ditch a losing investment, get objective advice, have an investment plan, and perform the necessary research. When you do, you’ll know that you’re on the right path to financial success.