Never Use Margin Account unless you completely understand the risks. The primary risk of margin account is to get stopped out our liquidated absolutely at the wrong time. Zsenia provide you with many tools that you can gauge the risk of individual stocks our ETFs, nevertheless, if you’re just starting and have not experienced market downturns it is better to avoid margin accounts unless you’re willing to risk losing material amount of capital under stress scenarios.
Never invest in something you “Don’t Understand” - One of the best fund managers ever, Peter Lynch, never touched anything he could not describe on one sheet of paper with a crayon. It is important to invest in things you understand because you will then understand the risks you are exposing yourself to. If you do not understand something, how can you possibly understand what makes the business do well or bad? You can easily be blindsided and lose a lot of money investing in things you don’t understand. Stick to what you know and always do your own research.
Build your positions over time - Dollar cost averaging is a great way to increase the amount of investments you have over time. Most people do not have a huge lump sum that they can invest at one time. Instead they get paid on a weekly basis. It is best to set up a schedule in which you contribute to your investment account and invest. The great thing about dollar cost averaging is that you accumulate shares over time so it is a way to diversify. You will avoid putting all your money into a stock or fund at its peak. It also removes emotion from your investment since you are investing on a regular basis. On a long-term basis, all of the fluctuations will smooth out and you will have time on your side and it will favor your account balances.
Avoid panic selling or illogical buying - Panic Selling is the act of selling a stock or fund without doing a fundamental analysis that backs your decision. It is purely driven by fear. People get worried and are worried about their investment account balances going down. Often times after panic selling, there are rebounds in the market. Panic sellers do worse than the majority of investors. They are taking losses that could easily be avoided had they done nothing. If you do not have an immediate need for the cash, just sit back and hold tight. You will thank yourself later when your account balance rebounds. Instead of flipping from one investment fund to another based on daily market volatility, most of the time it really is best to make a long-term commitment to your chosen fund. After all, there is no guarantee that a fund that has performed well in the past will do so in the future. Patience and commitment are keys to building up a successful investment portfolio over time.
Disciplined dividend reinvestment is vital - Dividend stocks are great to include in your portfolio. Companies that can pay dividends are generally more established as they can afford to pay out their shareholders after accounting for all of their business expenses. You have the option of taking the dividend as cash, or reinvesting the dividend automatically.
Dividends account for 43% of the S&Ps total return since 1930. Dividends are also great as you are closer to retirement as you can use the income as opposed to selling assets to finance your living costs. Another good thing about dividends is that companies generally tend to increase them over time. So dividends can help you combat inflation if you plan on using it as a form of retirement income. Be aware that a dividend is not guaranteed, and can be reduced or even eliminated.
Respect the Market and Remember it is Rarely Different this time - If something looks too good to be true in investing, it usually is. There have been several bubbles throughout history and they have all ended the same. Stocks rose to crazy highs only to come crashing down. You may be tempted to join the crowd but remember, everybody thinks they know when things will come crashing down. However, very few people can actually time it properly. It is best to avoid rallies and panic sell-offs. You are more likely to be a loser than a winner. Understand yourself and evaluate yourself as an investor. It can be easy to get caught up in your emotions, but eventually you will have to pay the price. Many people had to declare bankruptcy and lost their homes during the housing bubble. Some people have to work their whole lives to pay off the mistakes they made while they were chasing a rally.
Do not go with the Herd Mentality -
One of the biggest mistakes that people make is that they follow the crowd. If the crowds always knew
what they were doing, we wouldn’t have financial bubbles. You can definitely make money following the
crowd in the short term, but in the long term you are guaranteed to hit some big losses. You need to
look at the fundamentals of a business and evaluate the risks associated with it regardless of what
people think. Do not buy a stock because everyone is telling you to buy it. The same goes the other way.
Do not sell a stock just because everyone is telling you to sell it. Always consider the fundamentals of
the business when making your decision to buy or sell a stock. The key question one must always ask is
has the business model of the company or the competitive landscape changed materially? If the answer
is yes then one must evaluate the potential impact on its financials.