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They say that the market swings between the poles of fear and greed. Any investment decisions made near either end of these polarities will probably not be successful. A successful investor needs to follow a middle emotional path. This could be called the Zen of investing.
How Much?
Unless you are investing in a very safe vehicle, one with guaranteed returns, don't invest more than you can afford to lose. Betting it all on one company is a good way of going down in flames. If your investment leads you to believe you are going to get rich, you are too close to the greed end of the spectrum. If, as soon as you make your investment, you feel a kind of primal dread, you are too close to the fear end.
Invest in What?
It's a mistake to invest in the popular stock of the day, or even the market segment of the day. If you're new at the investing game, don't start with individual stocks at all. Not diversifying is a beginner's mistake. Rather than trying to pick winning stocks and get rich or, worse yet, listening to the TV pundits and buying their recommendations, you can get instant diversification.
You get instant diversification by starting out with mutual funds and/or exchange traded funds (ETFs). Some mutual funds and ETFs buy an entire index, such as the Dow Jones or Nasdaq. Others buy a market segment such as energy, commodities, pharmaceuticals, housing, etc. You need to at least do research into which segments are currently doing well or may be going up.
Chasing a Stock
Sometimes you will put in a bid for a stock that you really think will do well. But the stock goes up before your buy order goes through. So you raise your bid to the new share price. But it goes up again. When you continue to raise your buy price as a stock rises, that is called chasing a stock. The danger is that you will buy the stock at a high and will lose your blouse.
The Stop Loss
The reverse of chasing a stock is trying to prognosticate the high so you can sell at the best possible profit. No one can predict a high unless the fix is in. The best you can do is get as close as possible. There is a way to protect your investment and not end up chasing a stock as it goes down.
As your stock is rising, you can use what is called a stop loss. With a stop loss you are telling your broker that if your stock drops below a certain price, it should immediately be sold. (This is triggered automatically.) If the stock continues higher, raise your stop loss. You can keep raising your stop loss until the stock finally starts moving down.
Don't put your stop loss too close to the current stock price because there are normal ups and downs in the price and you may end up selling too soon. You might put your stop loss at roughly 10% or less below the current price.
Holding On Forever
Many experts will tell you to buy stocks for the long haul. This is generally good advice unless you happen to be living in 2009. Some stocks drop down to a dismal low and never come up again. The company may still be in business but nothing is happening in the stock price.
Sometimes you need to bite the bullet and deliberately sell some stocks at a loss. What's the advantage? While a stock might revive in five to 10 years, some will never recover. In the meantime, if you sell the stock, you will free up some cash to invest in something more promising. You can write off your loss on your income taxes.
Buy More Stock When the Price Drops
This may or may not be a mistake. It depends on how the story ends. I have failed and succeeded with this gambit. Essentially, you buy a certain number of shares in a stock that you feel good about. The stock goes up and then it goes down. It goes down to below the price you bought it at. You are in the red.
You can wait it out or sell in a panic. If you feel you are invested in a solid stock and you believe it is going to come out of its current slump, buy some more of the same stock at the lower price. Buyer beware! This could go either way.
Zen Investing
A book could be written on investing mistakes. I have personally made most if not all of them. If I have learned anything, it is to practice the Zen of investing. I try not to become too emotionally elated when my stocks go up. I try not to feel great disappointment when they go down. I practice patience.
I look at my gains and losses as just numbers, the way I look at my age. I think of the money involved as being like Monopoly money. (Unfortunately, our currency presently isn't worth much more than Monopoly money.) I am surprised myself at how casually I can gain and lose large amounts of money (on paper).
Good luck!
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