So you’ve finally taken the plunge and decided to dabble in ASX shares.
Congratulations! You’ve overcome the hardest part — getting started.
But like any endeavour in life, experience makes you better at the craft.
And many stock market beginners fall into the same psychological traps. They result in unnecessary losses and pain.
Some people might even turn away from investing in ASX shares after quickly losing their hard-earned.
“I see new investors making the same mistakes again and again,” financial expert and long-term buy-and-hold advocate Brian Feroldi said on social media.
“New investors should focus on avoiding big mistakes, NOT on being brilliant.”
Fortunately, Feroldi is willing to share his wisdom to fortify novice portfolios.
He recently compiled a list of 10 errors that novices make all the time, and how to avoid them:
1. Short-term mentality
Even the best-intentioned beginners fall into this trap.
“New investors are easily fooled by market randomness,” said Feroldi.
“Stock UP this week? ‘I’m a genius.’ Stock DOWN this week? ‘Investing is impossible.’”
Those who have been in the game for much longer know that day-to-day, week-to-week or even month-to-month performance doesn’t matter over the long run.
“Experienced investors know that stock returns are measured in YEARS, not DAYS.”
2. Putting all your eggs in one basket
Feroldi said that rookie investors “only see the upside”.
“They become convinced that they can’t lose and over-allocate to a single position.”
Veterans know that there is no ASX share that’s a sure thing.
“Experienced investors diversify, knowing that the future is uncertain and that no stock is guaranteed to succeed.”
3. Not doing research
Many new investors buy ASX shares without finding out anything about the company, what it does or how it performs.
“Many don’t even know HOW to do the research,” said Feroldi.
“Without research, you don’t have conviction. Without conviction, you won’t have the strength to hold through the inevitable downturn.”
4. Not having personal finances in shape
If your personal finances are in a mess, no amount of stock investing will fix it.
Those who dive into ASX shares without getting their debts, income and spending in order will run into trouble.
“They quickly learn that stocks are volatile, and handling that volatility is HARD,” said Feroldi.
“Experienced investors make their personal finances rock-solid first.”
5. Watching the stock instead of the business
Rookie investors are, understandably, very excited by their new shares. They watch them like a hawk for daily, or even minute-by-minute, stock price movements.
This is not healthy for long-term investing, according to Feroldi.
“Experience[d] investors focus intensely on company earnings reports and their estimate of the company’s intrinsic value.”
6. Selling winners to buy losers
Keeping winning stocks and cutting failing businesses out of your portfolio sounds obvious. But it’s remarkable how many investors do the opposite.
If you were gardening, would you retain all the weeds and cut out all the beautiful roses?
“New investors sell their winners and double-down on their loser[s],” said Feroldi.
“Experienced investors know that the opposite strategy is much more effective.”
7. Overconfidence
To be fair, hubris can strike both novice and veteran investors at times.
But those who have been through their share of busts are more aware of their own limitations.
“New investors are filled with confidence,” said Feroldi.
“Experienced investors know that the more they learn, the more they realise they don’t know.”
8. Having no strategy
Whether you favour growth stocks, value stocks, bottom-up picks or macro-driven investing or thematics, Feroldi reckons you need to have a coherent and consistent strategy.
“New investors just start buying and selling whatever stocks are popular,” he said.
“Experience[d] investors focus intensely on their investment process and make use of savings, research, checklists, journal, watchlist, vision, conviction and patience.”
9. Over-reliance on PE ratios
According to Feroldi, rookie investors put too much credence in the price-to-earnings (P/E) ratio as a tool to evaluate a stock.
He broke down the life cycle of a company into five distinct phases: research and development, launch, hyper-growth, maturity and decline.
“Experienced investors know the P/E ratio has HUGE flaws, and it is only useful in phase 4.”
During the launch phase, for example, the business is still not making a profit, so it’s more suitable to use the price-to-sales ratio as a metric.
10. Using options, margin and leverage
Those new to investing are in a rush to become rich, according to Feroldi.
“They use options, margin, and leveraged ETFs to juice their returns,” he said.
“Experienced investors know this is a recipe for disaster.”
Feroldi reminded everyone of Warren Buffett’s famous quote:
If you’re smart, you don’t need leverage.
If you’re not smart, you shouldn’t use it.
The post If you’re new to investing, you need to read this appeared first on The Motley Fool Australia.
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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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