5 things amateur investors often say

Many experienced investors can tell the difference between amateur investors and professional investors by talking to them. What matters is language. Here are some common investment statements that you should try to avoid, as well as some useful alternatives. They will not only make you sound more informed and wise when discussing the market, but they should also help you think like a professional investor.

Key points

  • Experienced investors can usually distinguish professional investors from amateur investors by talking to them.
  • No investment is certain, and experienced investors understand this.
  • Sometimes, the best trades are made when stocks are falling.
  • Costs such as fees and commissions can add up and erode returns.
  • Sometimes, passive investment that minimizes costs is the best approach.
  • Diversification is a wise strategy because individual investments are spread across different assets such as stocks, bonds, metals, and energy.

1. “My investment in Company X is positive.”

Misunderstanding: If a company is very popular, then investing in it will definitely bring huge returns.

Explanation: No investment is certain. Any company can hide serious problems from investors. Many big companies—such as Enron in 2001 and WorldCom in 2002—have experienced sudden declines. Even the best-financed and best-managed company may experience uncontrollable disasters or major market changes, such as new competitors or technological changes.

In addition, if you buy when the stock is hot, it may already be overvalued, which makes it more difficult to obtain good returns. One strategy to protect yourself from company failures is to diversify investment. This is especially important if you choose to invest in individual stocks instead of investing in an already diversified mutual fund, or in addition to investing in an already diversified mutual fund. In order to further increase your returns and reduce risk when investing in individual stocks, learn how to identify companies that may not be glamorous but provide long-term value.

An experienced investor would say: “I bet that my investment in Company X will be a huge success, but to be on the safe side, I only put 5% of my savings into it.”

2. “I will never buy stocks now because the market is performing badly.”

Misunderstanding: Investing in things whose prices are currently falling is not a good idea.

Explanation: If the fundamentals of the stock you are buying are still stable, the lower price may only reflect the fear of short-term investors. In this case, look at the stocks you are interested in as if they are on sale. Take advantage of their temporarily reduced prices and buy.

However, please do your due diligence first to find out the reason for the decline in stock prices. Make sure this is just a market downturn, not a serious problem. Remember that the stock market is cyclical, and just because most people are selling in panic does not mean you should do the same.

An experienced investor would say: “Due to the downturn in the market, I am now getting a lot of stock trading. A few years later, when the situation improves and the stock price rebounds, I will love myself for it.”

3. “I just hired a great new agent. I can definitely outperform the market.”

Misunderstanding: Actively managed investments are better than passively managed investments.

Explanation: For many reasons, the performance of actively managed portfolios tends to be lower than that of the market.

The following are three important ones:

1. Some online discount brokerage companies charge a fee of at least $5 per transaction, which is your job. If you hire a broker or consultant to do this work for you, your fees may be much higher and may also include consulting fees. These costs will accumulate over time and erode your returns.

2. Your broker may mismanage your investment portfolio. Brokers can enrich their own pockets by participating in excessive trading to increase commissions or choosing investments that are not suitable for your goals, just to obtain company rewards or bonuses.

Investors should pay attention to the trust rules introduced by the Ministry of Labor, which require consultants to disclose commissions and eliminate any possible conflicts of interest.

3. The possibility of finding a broker that can truly continue to outperform the market is very small. In other words, you may want to track the performance of the broker or advisor over time to determine whether the increased costs and fees are reasonable.

Or, instead of hiring a broker who may make decisions that are not in your best interests due to business structure, it is better to hire a financial planner who only charges fees. These planners will not profit from your investment decisions; they only charge an hourly fee for expert advice.

An experienced investor will say: “Now that I have hired a fee-based financial planner, my net worth will increase because I will have an impartial professional to help me make wise investment decisions.”

4. “My investment is very diversified because I own a mutual fund that tracks the S&P 500 index.”

Misunderstanding: Investing in multiple stocks allows you to diversify your investment.

Explanation: This is not a bad start, because owning 500 stocks is better than owning a few stocks. However, to have a truly diversified investment portfolio, you need to get involved in other asset classes, such as bonds, metals, energy, money market funds, international equity mutual funds, or exchange-traded funds (ETFs). In addition, since large-cap stocks dominate the S&P 500 index, you can further diversify your investment by investing in small-cap index funds or ETFs, and may increase your overall return.

An experienced investor would say: “I diversify the stock portion of my portfolio by buying index funds that track the S&P 500 index, but this is only a component of my portfolio.”

5. “I made $1,000 in the stock market today.”

Misunderstanding: You will make money when the value of your investment rises, and you will lose money when the value of your investment falls.

Explanation: If your profit is only on paper, then you have not made any money. Before you actually sell, nothing is set in stone. This is another reason why you don’t need to worry too much about the cyclical decline of the stock market, because if you insist on your investments, they are likely to appreciate. If you are a long-term investor, you will have many good opportunities to sell for profit over the years.

An experienced investor would say: “Today the value of my portfolio has risen by $1,000. I think this is a good day in the market, but it hasn’t really affected me because I won’t sell anytime soon.”

Bottom line

Some misunderstandings are so common that even your smartest friends and acquaintances may mention at least one of them from time to time. If you try to correct them, these people may even tell you that you are wrong. Of course, in the final analysis, when it comes to your investment, the most important thing is not to look or sound smart, but to actually be smart. Avoid making the mistakes described in these five verbal mistakes, and you will be on the right path to higher returns.

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