Like many people in the last few years, my first introduction to “investing” was on the stock trading app Robinhood (learn what investing really is here). A friend of mine showed me how the app worked and I was off to the races. At first, I bought a few shares of companies I was interested in and quickly forgot about them. A couple of months later I checked the account again and saw that the small amount of money I had put in had actually grown! The surprise growth was intoxicating. My initial excitement ultimately led to a painful learning experience. The stock market can be an incredible tool to grow wealth, but it can easily become a dangerous hobby in which bad choices are easy to make. This article serves as a down to earth guide about what not to do when you’re just starting out. I hope you can learn from my mistakes.
Resist the Tilt: In gambling and video games there is a concept called tilt. It is the idea that once somebody starts losing they are more likely to continue losing as they become more frustrated. When tilt occurs, it’s best to just walk away. While the stock market itself is not gambling, it has elements which can make this tilt incredibly apparent. One of the most difficult parts of investing in stocks is understanding how long to hold. While this decision ought to be made by every person based on their own situation, it can be heavily influenced by a sharp dip or spike in the value of a specific stock. I panicked when the overall market began to plummet in response to COVID-19 and sold a lot of stock at a loss. I thought I was preempting an even larger dip. In reality it was impossible to predict what the future held. If I had a set plan in advance about my investing timeline, this wouldn’t have been an issue. The world has seen countless crises. Wars, natural disasters, and even other pandemics have never prevented the stock market from eventually rising again. The investors who panicked with me all lost out. The investors who stayed calm and stuck to their plans weathered the storm. The smartest investors saw the dip as an opportunity to buy stocks at a discount. Don’t let your emotions get the best of you.
Stay Informed, But not Addicted: Investing is a very serious business. It literally involves putting your money into companies you have no direct control over. You need to understand where all of your money is going and be aware of your portfolio. But there’s a limit. Checking your investments constantly is not a healthy habit. It can reinforce tilt and lead to a preoccupation with small changes that likely won’t matter in the long run. At the height of my trading I would open my phone to check the markets at least once every fifteen minutes. I often had a second window on my computer displaying my portfolio as well. This was information for information’s sake. The second by second updates were not helping me make sound decisions. Staying glued to the market only increased my stress. It was also distracting from more important things like my job and friends. When your money is on the line it can be hard to look away. But consider the inverse. If your strategy requires you to worry about every little change in the markets, you need a new strategy. Take the time to think critically about how you want to invest. Investors who spend more time building a dependable strategy do much better than the ones who constantly check their account.
Only Invest What You Can Afford: This is the final and most important piece of advice. Just as with anything else, never invest money you can’t afford to spend. It is very rare that someone will lose their entire investment, but investing money can make it unavailable for a period of time and can certainly cause risk. Be sure that all of your other expenses and needs are met before beginning to invest. Also keep in mind, putting our money into stocks is not the only form of investment. Perhaps there are some better strategies you could utilize with different amounts of cash. At the end of day everyone is in a different place financially; however, regardless of where you are, be sure that you understand your expenses and understand how much money you can afford to move into different kinds of investments before doing so.
I haven’t always been a smart investor. As with everything in life (finance and otherwise) these things take practice. Hopefully, you can learn from my own mistakes and move forward a bit more confidently.