Becoming a successful investor is not just about finding the right stocks to invest in. In fact, mindset is the most important factor that determines investor returns. Having the right mindset can help you achieve your investing goal in spite of any short-term challenges and disruptions. There are investors who owned Apple and Amazon stock when the companies were still young but never benefited from their massive stock price appreciation because of the wrong investing mindset. Here is how you can avoid the same mistake.
The most common mistake of individual investors is overtrading. They buy and sell stocks too often because they can, and the zero-fee trading apps make it even easier. However, overtrading creates a short-term thinking mentality, which can be disastrous. Individual investors should take a long-term approach because by focusing on the short-term performance of the market, they compete with Wall Street investment banks that use advanced strategies to beat individual players.
Beginner investors often believe that investing in the stock market is all about getting rich quickly. This wrong perception makes them impatient, and they ultimately make the wrong investing decisions. However, successful investors are patient. They don’t try to time the market, which is impossible, or make a quick profit. They understand that investing is a long-term game and that it takes time to see significant returns. Apple or Amazon didn’t become trillion-dollar companies overnight. Instead, they grew over the years and rewarded patient investors who believed in their future prospects and remained invested even during down markets.
A stock market ticker represents a share in a real company that sells products and services. Many investors forget that, and treat tickers simply as symbols with a price that goes up and down. Successful investors realize that every ticker is a real company with underlying fundamentals that must be analyzed. Successful investors focus on the underlying fundamentals before investing. They look at the company’s financials, business model, management team, and competitive advantage to determine if it is a buy or not. They don’t get caught in short-term hype or trends that always end abruptly and can lead to losses for inexperienced investors.
The stock market is designed to drive inexperienced investors to make the wrong investing decisions. This is because inexperienced investors are not trained to be patient and have long-term thinking. Also, they typically buy stocks that generate buzz, without analyzing their underlying fundamentals. As a result, they make emotional decisions, which always lead to the wrong results. They panic and sell when the market is down and become greedy and buy when the market is expensive. Successful investors do the opposite. They keep their emotions in check and make rational, emotion-free decisions based on data and facts. They understand that emotions can cloud judgment and lead to poor decision-making.
Discipline is a key trait of successful investors. They have a proven investing strategy and always remain stuck to it. This means they don’t change their strategy even if it doesn’t work for short periods of time. Most investors cannot resist the temptation to make impulsive decisions based on short-term market fluctuations. But as we saw above, acting like a robot, avoiding emotional decisions, and staying disciplined is key to avoiding investing mistakes that cost.
It is easier to stay disciplined and avoid emotional decisions when you are diversified. Successful investors understand the importance of diversification and don’t put all their eggs in one basket. Instead, they spread their investments across different asset classes, industries, and geographies. By doing this they can reduce risk, and as a result, avoid irrational decisions when some investments do not perform as planned.
Markets do not go up in a straight line. Small or big corrections happen all the time. Investors with a winning mindset understand that market crashes are the best times to enter and not exit the market. Inexperienced investors tend to sell during market crashes when successful investors scoop up shares at cheap prices.
Having the right investing mindset is more important than any investing strategy. Without the right mindset, investors make impulsive decisions at the wrong time – they buy when they should sell, follow the herd or get caught up in short-term hypes. The seven principles above can help you avoid common mistakes that most beginner and inexperienced investors make.
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