The stock market is a valuable way to create wealth. Unfortunately, a lot of investors do not do well in the stock market. In fact, due to recent bear markets some investors have not made any significant gains in the last decade. While a poor market does hurt gains, there are other reasons why many investors fail to make money. Here are four mistakes that individual investors make.
1. Buying Huge Companies. A lot of people have done poorly by buying too late. Investments in companies such as Microsoft, Cisco and General Electric have done poorly in the last ten years. When a company has grown for years, it is natural for the stock to remain dormant. A good investor should seek out the next Microsoft or IBM instead of buying stock in already well established companies. In reality, large companies are good for stability and can still offer impressive returns but should only compromise a small part of one’s portfolio.
2. Too diversified. Every investment adviser preaches diversification. In reality, diversification is a great thing and can protect an investor from serious losses. Unfortunately, a lot of investors own too many stocks and mutual funds. When an investor is over-diversified they can miss out on serious gains. An investor who can research companies and pick great stocks has a chance to do much better. Not only that, an investor who is over diversified will spend a lot of money on transaction costs.
3. Trading Too Much. One of the biggest mistakes investors make is to trade too much and buy/sell shares to often. When an investor picks good stocks with strong fundamentals, they are well on their way to making money. Often, an investor will sell a stock too soon to lock in gains. Unless the fundamentals of a company have changed, an investor should ride out the gains. Trading too often will also create a tax headache when trading outside of a retirement account.
4. Buying something because it is cheap. A lot of investors see a cheap stock and get excited. In reality, there is often a reason for a stock having a low price. Previously, investors have fallen for the trap and purchased stocks such as Lucent or AMD, only to see the stocks fall further. When an industry changes or when a company fundamentally changes it may be time to rethink the investment.
It is not difficult to make money in the stock market. An investor should do their research when looking at a stock. By understanding how to evaluate a stock, an investor will be ahead of the game. A serious investor, who can analyze stocks, will do much better than most professional fund managers. An investor who follows these tips is well on their way to making a decent profit in the stock market.