Newcomers to the stock market should pay attention to some important tips and advice before purchasing their first stock.
• Diversification is the be-all and end-all on the stock market
• The longer the investment horizon, the better
• Not investing is the biggest mistake
International corporate investments have achieved an inflation-adjusted return of 6.5 percent over the past 120 years. This is the conclusion reached in the “Global Investment Returns Yearbook” published by Credit Suisse. The study leaders at the Swiss financial institution analyzed this Financial markets from 23 countries worldwide in the period from 1900 to 2019. With such a return, stocks were able to leave both money market securities (0.8 percent pa) and bonds (2 percent pa) far behind.
The eight biggest mistakes when buying stocks
Although these results cannot be extrapolated to the future, they nevertheless serve as a good indicator of the long-term potential of the stock markets. However, this fact does not mean that as a newbie on the stock exchange you can buy company shares indiscriminately and that they will definitely increase in value over time. In this context, the traditional stock market wisdom from the old master Kostolany: “Buy stocks, take sleeping pills” refers, if at all, to a broadly diversified portfolio that contains at least ten solid individual stocks.
In order to be able to successfully get started on the capital markets as a newcomer to the stock market, you should pay attention to some important tips and advice. Because on the stock market, every major mistake immediately reduces returns and costs money.
1. Put all eggs in one basket
As the negative example of Wirecard has shown, even seemingly solid DAX stocks can become almost worthless in an instant. Since unforeseeable events can always occur on the stock markets, this does not always have to be a case of fraud. Industry- or company-specific crises or accidents can also cause the prices of individual stocks to collapse massively. For example, in 2010, as a result of the blowout of the Deepwater Horizon drilling platform, the price of BP shares collapsed by around 50 percent within a very short period of time. Although such results are the exception, they can quickly drag a poorly diversified portfolio into the abyss.
This so-called unsystematic risk describes a specific risk, which in certain cases only affects a single industry or a specific company. However, with the help of diversification, i.e. a broadly positioned stock portfolio that extends across several companies and industries, this risk can be kept low.
With the right portfolio composition, such a risk can be eliminated with just 10 to 20 different stocks. Newcomers to the stock market do not necessarily have to rely on a fund or ETF that invests in 1,500 securities.
2. Short-term thinking
Newcomers to the stock market in particular, but also private investors in general, often underestimate the long-term potential of stocks and often undertake unnecessary transactions that directly affect returns.
In this case, as is often the case in the stock market, you should trust the opinion of Warren Buffett, who once said: “If you are not willing to hold a stock for 10 years, you cannot own it for 10 minutes.”
Since the long-term returns on the stock markets, for example 6.5 percent per year, are not achieved linearly, investors inevitably have to sit out interim fluctuations or crashes and corrections within their investment period. As a rule, an investment horizon of 10 to 15 years makes sense.
3. Invest planned money
So that investors can ride out the interim fluctuations on the stock market, they should only invest their “superfluous” money. Money that is budgeted for daily living expenses, upcoming car repairs, a broken washing machine or monthly rent has no place in the stock market and should be kept in the current account or in cash.
4. Buy stocks on credit
A mistake that is often made by newcomers to the stock market is buying shares on credit. While in the case of a classic total loss only the invested capital is gone, with a leveraged share purchase there are still liabilities that have to be repaid, even though the entire investment has long been worthless.
5. Chasing hype
The stock market and the stock market thrive on the narrative myths of quick money. This circumstance can be particularly devastating for those new to the stock market, as greed is known to eat the brain. The stock market speculator Kostolany already knew: “You should never run after a tram and a share.”
Ideally, investors should always weigh up their investment decisions completely rationally and not allow them to be influenced by emotional impulses. The so-called FOMO symptom (Fear of missing out), i.e. the fear of missing out on something, is therefore inappropriate on the stock market. Because “the stupidest reason to buy a stock is because it’s going up,” according to a quote from Buffett.
In addition, investors should always be wary of supposedly “hot” stock tips and short-term trends. A buy-and-hold strategy is recommended for investors who want to achieve a positive return in the long term.
6. Having no knowledge of the stock market
Although you don’t have to be an economics professor to make money with stocks, if you’re new to the stock market you should still acquire a variety of basic knowledge about the financial markets and the business models of individual companies.
Warren Buffett’s motto is: “Only invest in a stock whose business you understand.” Only if an investor really understands how the stock market works and how a company makes profits can they assess the long-term potential of a company.
7. Procyclical stock purchases
One of the most popular mistakes among private investors is buying stocks pro-cyclically. Accordingly, many investors only enter the market when it has been in an upward trend for several weeks, months or even years, or exit just when the low point in a crash has been reached. The Frankfurt banker Carl Mayer Rothschild already knew: “Buy when the cannons thunder, sell when the violins play.”
However, investors who do not necessarily want to worry about the right timing of stock purchases can also act according to a predetermined investment plan and invest a certain amount every month or every six months.
8. Don’t buy stocks
Probably the biggest mistake you can make when buying stocks is not to buy any stocks at all because you are afraid of possible losses. Unfortunately, a large part of the population makes exactly this mistake.
One should keep in mind that the measure of risk that is always associated with a stock investment is described in finance as the intensity of fluctuation or volatility of stock prices. The supposed risk therefore quantifies the degree of deviation from the mean within a certain time window, regardless of whether prices rise or fall during this period. Accordingly, the risk taken always represents an opportunity. Only those who fully understand this connection can be successful on the stock market in the long term.
Pierre Bonnet / finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.