6 common mistakes people make when investing their money in the stock market and how to avoid them

The pandemic and the confinements unleashed a boom in young investors who for the first time entered the stock markets.

Many young people who had savings – especially in developed countries – dared to trade on the stock market.

One of the drivers of this fever has been the rapid expansion of brokers online, or online stock brokers, who through an application on the mobile phone opened the doors to inexperienced adventurers by charging very low commissions (or even no commission) for the service.

But just as intermediaries have grown online, also have increased the failures of the inexperienced who, after reading a little, believe that they can jump into the water on the advice of friends or influencers in social networks.

In parallel to online operators, there are traditional investment banks or stock brokers in the market that offer analysis and recommendations in exchange for a payment for their services that, in some cases, can be quite high.

Whichever path you choose, if you want to invest in the stock market you have to have an intermediary that connects your funds with the stock market; that is, to execute your buy and sell orders.

And that broker It must be registered with the regulatory authority of each country in order to carry out the transaction.

After this step, you will have to analyze whether you want to invest in variable income instruments (such as stocks or funds) or in fixed income instruments (such as bonds).

It all depends on how much you are willing to risk. The higher the risk, the greater the possibility of earning more money. And the lower the risk, the return you can achieve with your investment will be reduced.

“It is key to know your risk profile”Hugo Osorio, Deputy Manager of Investment Strategies at the financial services company Falcom Asset Manager, tells BBC Mundo.

These are some of the main mistakes that novice investors make when they decide to put their money in the stock markets.

1. Look at the short term

One of the most common mistakes among those who start investing is looking for short-term profits. “The minimum is to set a horizon of three years,” explains Osorio.

Those who are dedicated to investing in a professional way usually do so thinking about obtaining long-term profits, precisely to avoid the volatilities of the stock markets.

With that in mind, the greater the amount of money invested, the greater the returns you will earn over time.

As the money adds interest, the amount reinvested will also grow. This is called compound interest; that is, earn more money with your own money.

2. Don’t diversify

This is a basic rule of thumb for any investor, regardless of having little to a lot of money.

Not all funds can be put in one place. That is why experts speak of having a diversified portfolio, with a part of your resources invested in variable income instruments and another part in fixed income.

In countries like the United States, the idea of ​​investing 60% of the funds in equities and the other 40% in fixed income is common, but this formula is not usually recommended for investors who are just starting out in the stock markets, warns Osorio .

It is best to start investing in a cautious way, building a portfolio (investment portfolio) with different types of financial assets and with different levels of risk exposure.

Like when you go to the supermarket and you put different products in the basket. You can combine, for example, stocks, funds, bonds. And if you have more resources, you can add coins, raw materials and other more specialized products to the basket.

In recent times, the market has gained ground as an investment instrument ETF (Exchange Trade Fund, for its acronym in English), which in Spanish are known as exchange-traded funds: a product that mixes the world of mutual funds and the world of stocks.

Whichever way you decide to invest, just make sure the mix is ​​diversified and appropriate for your risk tolerance and investment goals.

3. Get scared and sell

In the stock markets, not all decisions are made with a cool mind and, although expectations are based on technical analysis, there are always irrational or unconscious elements that come into play.

If you manage to withstand a sharp stock market crash without selling your shares, it is possible that when the rebound comes, you will make a lot of money. The problem is that when panic spreads, the domino effect can cloud your judgment and lead you to make hasty decisions.

A close example is what happened last year with the covid-19 pandemic. The following graph shows the impact of volatility on the markets during 2020.

If your sights are set on the long term, theoretically a sharp drop shouldn’t prompt you to sell amid the storm.

4. Invest without considering your risk profile (or having an investment plan)

We all have a different risk profile.

A good analysis of the limits of your financial conditions and the objectives you pursue is essential to know what is best for you.

Some of the essential questions are: how much money can you invest, how much are you willing to lose, in what term do you expect to achieve profitability, what is the objective of the investment. Do you want to earn quick money in less than a year to finance your studies or do you want to invest to have a good retirement?

For those just starting out on this journey, the experts’ recommendation is to seek advice. And as you study and know how the markets work, you will have more tools to risk walking alone.

5. Not paying attention to commissions and other associated costs

For those who prefer to invest following the recommendations of a specialized advisor, it is necessary to compare the commissions that these experts charge for their service.

But not only that. We must also consider that there are other associated costs to stock transactions that can affect the return you were expecting.

In fact, if the amount to be invested is very low and the final cost of making the transaction is very high, it may not be worth entering the stock market.

Even if you decide to enter the market using a platform online that charges a minimal commission (or none), in any case there are a series of costs that are implicit in all investments.

For example, there are charges for selling and buying assets (sales commission), custody charges, those for maintaining the securities account or charges for inactivity, payments when withdrawing dividends or, for example, costs for changing. your products from a broker to another.

On the other hand, if you work with a foreign intermediary, whose headquarters is in another country, you will have to check if that broker is authorized to carry out transactions.

6. Get into debt to invest

This error can be really serious. If you are starting to invest, it is not advisable to incur debt to make transactions.

There are financial advisers who can pressure you to invest larger sums of money through loans.

Or even the brokers online They can harass you with cell phone messages so you don’t miss out on “great opportunities.” Not for nothing does the English expression FOMO (fear of missing out, which is something like the fear of losing something), which can lead you to invest when you have no money, simply because of the fear of losing the moment.

Sometimes these situations occur, for example, when a person has had a good streak and is tempted to go into debt to earn more.

Like when players go to the casino or horse races to bet money and get caught up in obsession.

Investing can also become addictive.

And, when it comes to the stock markets, we usually see only one side of the coin: that of the winners. The media is routinely full of stories of humble billionaires who invested and succeeded.

But studies show that, in practice, more individual investors lose money on the stock market than win.