1: Getting emotionally involved
Most people quickly learn FOMO (Fear of Missing Out) or FUD (Fear, Uncertainty and Despair) in their first few terms of trader lingo. It is one of the most widely discussed principles in investing, as well as in behavioral economics.
When something we care about (like money) is at stake, we’re naturally inclined to avoid taking any losses, even if small. Even if trading at a small loss, is much better than a catastrophic one.
However, when it comes time to sell, the new investor often has an optimistic view. Maybe they think there’s more upside than before. It may be down now, but it could double or triple by next year!
This is how bagholders are made. If you’re unfamiliar with the term, a bagholder is someone stuck with a catastrophically devalued investment.
The same goes for those who react with pessimism. Many people are struck with fear by standard market fluctuations, and sell at cyclical low points, that are bound to bounce. This is solved by taking emotion out of the equation, and relying on principle and objective standards to guide trades.
Technical analysis is a great standard to judge an investment by. While fibonacci sequencing, and other forms of trend analysis are difficult to learn, you can start by simply looking at patterns in the markets.
Charts and information are readily available online for most investments, whether it be real estate, stocks, cryptocurrency, commodities or futures. Many of these charts come with tools to help in finding fibonacci levels and averages etc.
2: Trying to “Follow a Formula” instead of having your own reads and ideas on markets
Considering the strategies and ideas of other investors in a similar situation to your own to can be very helpful. Although, problems arise when one relies on them too heavily.
You should always consider the source of the advice you’re receiving. What are the potential incentives, bits of information, confidences and fears that contributed to their idea? Do they align with the same standards you use?
An important key to using advice properly is understanding the difference between technical and fundamental analysis. As stated before, technical analysis involves studying the patterns and sequences of the various price points in a market’s history, to help predict an accurate current valuation.
Fundamental analysis predicts valuation based on merits, such as the people running a firm, its value proposition, or various other factors that spur future growth. A useful saying is that fundamental analysis is good for choosing what to buy, and technicals tell you when.
Without solid fundamentals, you won’t be able to find credible investments that are worth your money. Meanwhile, technical analysis tells you the right time to purchase, as well as when to sell for acceptable profit, or take minimized losses.
3: Diversifying too much or too little
Depending on the amount that you have to invest, you may need to allocate these amounts differently amongst your assets of choice. This is done for the reason of hedging against the risk of one particular investment failing.
The hope is that with smart investments, your winners will compensate for the risks that don’t pan out. However, this doesn’t mean that the more diversified you are, the better your chances.
If you split up your money too much, you miss out on the compounding effect that a big winner may have for you. In markets like cryptocurrency, there’s a very small selection of tokens that will provide consistent and reliable returns.
Therefore diversifying often leads to a higher probability of more losers than winners. The same goes for markets such a real estate.
Buying a wide variety of properties makes you vulnerable to a market crash, and more likely to receive a bad deal. You’re better off searching hard for a good deal on a single house, and putting more money into renovations to maximize the resale value.
Look at your investments, and how much you have. Decide for yourself what the best way to hedge against risk is, given your amount of disposable income.
4: Comparing own success to others
If you catch yourself looking at other successful traders, and wondering why you end up on the wrong end of the market’s movements, then it’s time to take a realistic look at your investments, and why you invest.
It is all too easy to compare your situation to someone else’s, and try to recreate their success. If you’ve done this before, taking cues from Warren Buffet, or other large firms, you’ll realize it doesn’t work. Large firms and wealthy investors have the collateral to afford risks, and can be bailed out by just a few big wins in the markets.
Hence, this influences the choices that they make. A trader who has a few thousand dollars he would like to invest wouldn’t benefit from these trades.
Everyone has their own financial positions, limits and risk tolerance. Therefore everyone’s trading strategy should be personalized. Looking at how much you are putting in, when you are buying, and what merits your buys are based on is important to this personalization.