Welcome to the second part of PHStock’s “learning investing” series (you can find the first part here). In this post, we will discuss the pitfalls to avoid in stock investing.
(PLEASE NOTE: This article series is intended to those who ARE VERY NEW AND HAVE NO IDEA what stock investing is.)
Okay, so now that you know what stocks are and how to make money in the stock market, you will definitely be itching to start having that stock trading account soon.
Stop. Ooops. Is that right? Stop? Why?
Before you race of to go sign up with a stock broker, there are some cautionary points that you need to consider before you proceed. Often, and for some people who have totally no financial education or background, these are some of the common mistakes that you need to avoid.
Investing before paying off credit cards. If you have credit card debt, it is advisable to pay them down first, totally, before starting your road toward investing and gaining double-digit growth rates on your money. It is very important to make sure of that.
Thinking short term. It is preferable for you to invest in the stock market long term, because of what our good friend compounding does. But it should be the money that you won’t need for at least two to three years, and then you should invest for a minimum of five years.
Being passive. No one can be totally sure that the market will go up on the first day you started investing; or the first month; or even after a year. But one thing is for sure. Doing nothing will not grow that money. So while making sure that you stay invested in the long term, you also have to make sure that you are reinvesting the capital gains and dividends that you are earning out of those investments to take advantage of compound interest growth.
Being an Evel Knievel. Investing in stocks is not for everyone. If you feel you will get a heartburn if you see day in and day out your portfolio bleeding, then you should not put your money into the stock market. But even if you’re a daredevil, you should not pour all of your money into something as risky. Of course, the financial rewards could be great, but not unless you do a lot of homework into which company to invest in, when to buy, when to hold, and when to “let it go” and lock in your profits.
Starting late. Time is the best ally of stock investing. The sooner you start, the better.
Trading, not investing. The time-tested approach to investing is the long-term approach. Once you have decided to start investing in stocks, you have to think of the long term, like saving money for your future. Pick your investments well and you will reap greater rewards over the long term. Trading will get you saddled with fees (we will talk about these in the next posts) that will erode your returns. However, and as mentioned above, you need to know when to sell so that you can lock in those capital gains, which you can then re-invest.
So, in line with the above pitfalls, here’s what you have to do:
1. Review your finances.
The first thing you should do is determine how much money you have to invest. Ask yourself:
– Am I currently carrying any consumer debt?
– Do I have an emergency fund to cover my needs in the event of a job loss?
Based on your answers to the above, you should be better able to determine how much you have to invest in the stock market. It’s not about how much or how little you have to invest, what is important is to start investing. This is where the idea behind compound interest comes into play. The sooner you begin, the more time your money has to grow. With wise investments, a little can turn into a lot over a long period of time, so don’t let a small starting amount scare you away from investing.
2. Educate yourself.
Education is one of the most important factors in early investing success. This is especially the case if you haven’t had much experience with investing.
If you are like many beginning investors, you may not know where to look for quality, unbiased investing guidance. While there are many resources online, the best resources can be found through your online brokerage. In most cases, this education is free and can be a great boost to your investment knowledge. The Philippine Stock Exchange, through its PSE Academy, sometimes offers FREE–you got it–FREE seminars and workshops when it comes to investing in the stock market. So you just have to keep a lookout for it.
Not only will educating yourself help you feel less overwhelmed when it comes to investing, it should also help your bottom line because you’ll learn how to recognize high-fee investments, avoid them and move toward a purposeful investment strategy.
3. Invest with a plan.
One of the first things you should do when you start investing is come up with an investment plan. This investment plan can be as simple or as detailed as you want. The investment plan stage is where you need to determine your investing goals. For example:
– Are you investing for retirement?
– Are you investing for a child’s college education?
These are just some of the questions you can ask yourself. You have to make your plan personal. You also have to make it relative to the amount of time you have to reach your goals and your risk tolerance. Your answers to questions like the ones above will help you form a framework for your plan that can ultimately help you reach your investing goals.
Investing in the stock market can be overwhelming–especially if you have no one to guide you–but by following a few simple steps, you can start down the road of investing for your future.