Investing is an art form and few of us learned from an early age how to invest. According to statistics, only thirty-three percent of adults worldwide are financially literate. This means that around 3.5 billion adults globally, most of them in developing economies, lack an understanding of basic financial concepts.
In the United States, 57% of adults are financially literate, according to the Milken Institute.
So, if you are an adult what are you teaching your children?
With that said, it’s easy to understand why you as an investor can fall for these traps. Here we look at some of the common investing traps beginners face so at least you can avoid them before it’s too late
Thoughts vary from investor to investor and many lack the basic financial knowledge to understand where to start looking and what to invest in.
Today, social proof has become very powerful for persuading investors and you need to proceed with caution when reading about the next ‘big stock’ that’s on the horizon.
Below is a simple 4-question test to see what your understanding is of basic financial terms. You would think many more would have answered all correctly.
How many of these 4 multiple-choice questions can you get correct? (Answers are at the end of the test)
1. What is the safest investment asset class?
Stocks? Real estate? Futures? or Treasury bonds?
53% got this one right
2. What happens to bond prices when interest rates rise?
Bond prices do not change? Bond prices fall? or Bond prices rise?
25% got this one correct
3. What is a bull market?
Expect stock prices to fall? Expect stock prices to rise? Or People are not optimistic about future prices?
53% were correct
4. What happens to your stock if the company goes bankrupt?
The stock is sold to a 3rd party buyer? The stock increases in value? The stock becomes virtually worthless?
And 64 % got their correct
On average, 48.7 % of the questions answered correctly indicated less than half of those participants are financially literate.
It does not matter what your score is. Life is not about passing an exam. You have a choice. Educate yourself and increase your chances of investing successfully.
Here are the answers:
(1) Treasury bonds (2) Bond prices fall (3) Expect stock prices to rise (4) The stock becomes almost worthless
Everything we do has a degree of risk. All risk involves a possible loss of some kind. And the pain of losing is twice as strong as the elation of winning. When investing, it’s a good idea to have an understanding of the investment and how long you intend investing for.
Whatever the term you intend investing, you need to adopt the mindset for that term. If you are investing for the long term then any short-term volatility in the market is not going to affect your decisions as much as it would if you were investing for the short term.
Investors make the mistake of reacting to every downturn the market takes and selling off too soon because of the fear of losing.
Without enough knowledge of what you investing in, fear is most of the time in control of your decision-making.
If you have made a long-term investment decision, and in the short term your investment is jumping up and down, nothing will affect your thought process because you understand short-term volatility.
Here is a typical example of how many people fall into this trap. A particular stock is dominating recent news headlines. It’s all over the media, exploding in value, so you act on this new information and buy the stock.
By the time you buy this “wonder stock” the price has risen from what it was originally and you end up paying too much for it.
You bought the stock at the wrong time. It could crash, and go down for weeks, months, maybe years! You don’t know.
Buying hype and most talked about stocks is not a good idea and following the crowd seldom makes investors rich. If you want long-term wealth you need to focus on the mental approach and educate yourself in it.
Real gems and deep value investing are buying low and selling high. These investments are found where nobody is looking or discovering.
When it comes to investing it’s very easy to overestimate your investing ability. The thought of “beating the market” lurks in the back of your head. This is not a common occurrence and even professionals have difficulty pulling it off.
Overconfidence leads to making bad decisions and unnecessary losses.
You may have found business success. This however does not mean you can transfer those skills to investing. Many people find themselves in this situation and sometimes lose everything. Don’t overestimate your abilities and prospects.
It’s time to get real and be honest with yourself. The market does not care about your beliefs or ideals, it moves in the direction it wants to. Learn more about how and who moves markets.
Most of the news coverage today is on movements of popular assets. Blindsiding you to other assets with real value and growth opportunities in markets where nobody is looking. Stay away from expensive assets and crypto, Unless, you are knowledgeable in this market.
If you want to succeed with any investing you need to do research on what you investing in and know what to look for.
For example:
> Is the management of the company good?
> What do they do?
> What is their price-to-earnings ratio? Is the company good value?
> How volatile has the stock been? what do the charts say?
> Is their value in this company? do they have debt? can they service the debt?
> What is their dividend history and yield?
There is so much more and the more you dig the better decisions you can make.
Research is pointless on the other hand if you don’t know what you looking for. Do a thorough check and never second-guess.
It is a lot of work to do and if you're interested in long-term investing with a ‘done for you” approach to research, here is a great resource for you.
This is not only very risky, it’s also a way for you to lose a lot or all of your money. Should the sector collapse, you lose everything.
You know the old saying: Don't put all your eggs in one basket? Well, it’s true in the investing world.
Spreading your investments over many different market sectors gives you a higher probability of making gains over the long term and lowers the downside risk. Especially when you buy at meager prices and eventually sell when they are high.
Some investors make gains of 150% to 300% profit!
If you want to see actual profits of portfolios as recent as 2017- 2021 and partake in global market investing ideas, look at his resource.
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