Avoid common mistakes in stock market investing
It’s a new year and maybe some people are thinking: why not start investing.
The stock market is a relatively easy place to start, with the price of admission accessible to many people who are willing to set aside an investment fund.
What prevents many from doing so? Perhaps it’s the volatility we read about in the news, or maybe we’ve heard of friends or family who lost their shirt parking money in equities.
Risks abound, and it’s good to be wary—that keeps investors grounded. Better, still, if you’re informed.
Inquirer Business asked some market experts for some pro tips on how to overcome common investing mistakes.
Here are their answers:
Cristina S. Ulang
First Metro Investment Corp.
Know your risk appetite
“Investing in the stock market is not for everyone. It is a risky investment and its volatility can give an investor sleepless nights. Stock prices can go up or down in an instant and by a hefty amount.
“An investor should have a realistic understanding of his/her ability and willingness to take on loses before he/she decides to participate in the market.
“Investors should only allot investable funds for stocks that they will not need in the near term as it may take several years to fully recover their investment in case the stock prices drop in value.
“Prior to investing in the stock market, investors should ensure that their emergency funds are fully funded to cover unforeseen expenses and prevent them from withdrawing their stock investments.”
Buying high, selling low
“Emotions rule the investment decisions of the amateur investor. The veterans focus on the stock fundamentals.
“Emotions are tricky, leading investors to chase the market run-up. That produces very bad entry prices that are prone to losses upon market correction. Fundamental analysis will lead investors to choose the soundest company in the market, giving him the confidence to hold the stock even in the face of market volatility.”
Timing the market
“Many investors attempt to time their entry and exit from the market to generate the most gains from their investments. Typically, investors would like to buy a stock when he/she believes it has touched its bottom and sell when it has reached its peak. However, empirical evidence shows that market timing is difficult to achieve because we cannot tell with certainty what will happen in the future that would allow us to time when the market is low enough to buy and high enough to sell.
“Don’t do speculative investing. Invest in the right stocks, those that are profitable and have good management behind them.”
Jose Mari B.Lacson
Head of equities research
ATR Asset Management
Failing to plan is planning to fail
“Whether you are an investor or a trader, you need to have a plan. It can be a long-term strategy or a short-term strategy.
“The point is you need to identify what you intend to do for a particular horizon e.g. what to buy, what to sell, how much and others. What are the triggers for you to change your plan? What do you need to monitor given the time-resource you have.
“More often than not, most people just want to know what to buy and thus end-up joining consensus or being the one holding the bag once the market exits from a stock. Always have a plan of entry and exit.”
Taking luck as evidence of skill
“Most investors who make money in the stock market believe that they are gurus or experts just because they read a book on stock market investing and/or made a decent profit on one particular investment.
“Profit from the market requires the following ingredients: good luck and timing. You can improve on the probability and/or sustainability of success by doing your homework but never, ever assume that you’ve got the golden touch because it breeds risk-taking that could spell larger losses in the future. Be humble.”
Believing in forever
“As the saying goes, ‘walang forever.’ In the same vein as globalization is now under threat by populism, you cannot count on accepted truths or trends to last forever. Just as empires rise and fall, profitable companies in the past do not necessarily maintain their profitability in the long-run.
“A company known for regular healthy dividend payout for nearly a decade can change its payout policy in a snap if profit growth becomes too challenging. Be forward looking.”
Bottomline: Do your homework
“Do your homework. If you don’t have the time, choose a broker that can do it for you— just expect this service to be more costly relative to discounted services.”
COL Financial Group Inc.
Try to time the market, investing short-term
“Statistics show that most market timers actually underperform investors with a buy and hold strategy. This is because people are emotional and usually end up buying high and selling low.
“Investors who invest for the long-term maximize the power of compounding and returns are much higher. They also successfully overcome volatility as statistics show that potential losses diminish significantly as the holding period lengthens.”
Buying based on tips, not diversifying
“Nothing beats doing your homework and buying stocks with good earnings growth prospects trading at cheap valuations.
“Making concentrated bets or not diversifying: the performance of your portfolio will suffer assuming that you are heavily invested in only one or two stocks that don’t perform well.”
Paying high fees
“Paying high commission rates on brokerage accounts, mutual funds and UITFs, actively trading accounts (leading to high transaction costs). These high transaction costs drag performance.
Overcome these by:
1. Buying funds instead of individual stocks
2. Invest when money becomes available rather than when the time is right
3. Avoid overtrading
4. Do your homework in picking funds and stocks
5. When buying stocks or equity mutual funds, use only money that you will not need in the next few years.