5 Indispensable Lessons Every Investor Should Know

Investors make the same investing mistakes over and over. Knowing about certain pitfalls will help them navigate the stock market more successfully and improve their returns.

Aug 17, 2014 at 10:00AM


Photo credit: StockMonkeys.com.

Novice investors and seasoned stock market veterans alike often run into the same pitfalls when putting their hard-earned dollars into equities. In order to avoid these mistakes, it is paramount that people attain a deep understanding of how to invest successfully.

The five pieces of investing wisdom listed below are certainly not comprehensive, and various investors with different educational backgrounds certainly can run into different pitfalls when picking stocks.

Awareness of stock market investing principles will hopefully contribute to significantly better returns for investors in the long run and, more importantly, lead to the protection of investors' principal.

1. Invest only what you can lose
Even though this sounds straightforward and intuitive, many investors invest money that is or will be needed elsewhere at some point in the future. There is nothing worse than having to sell a stock (possibly at a loss) just because you need the money for other purposes.

Only invest what you don't need and what you could afford to lose in the worst case.

2. Don't lose
Investors should approach investing with the premise that they don't want to lose money. This can make all the difference, especially when investors are confronted with highly speculative and volatile investments in which timing and investment success are often only a question of good luck.

3. Don't chase the latest fads
Chances are that most investors are already in on it, and the hot stock tip you received from your uncle or neighbor is not that hot at all.

In fact, staying away from "hot stocks" and "sure things" is probably the best way to avoid investment losses and a lot of disappointment. See also rule No. 2.

4. Do your own research
Yes, investing is work. If you don't know how to read financial statements or how to understand the business of a company you seek to invest in, educate yourself first before risking your cash.

Research will often help you in identifying poor investments. Many investors don't do their own research at all, but rather jump on the bandwagon in hopes that everything will turn out fine.

Investing takes effort, especially if you want to be successful and survive multiple business cycles.

5. Expect the unexpected
Investors often make the mistake of assuming that everything will be in the future just as it is in the present.

However, money in the stock market is made by placing your chips on change, not on the status quo. Expect volatility to change in an instant, either with respect to a market or a particular stock. Be prepared for irrational market movements, too.

Stock markets and share prices never move in a straight line. So you better be prepared for an occasional setback that will test your patience. If investing was easy, everyone would be doing it.

The Foolish takeaway
Investors who follow these basic and timeless principles should be well on their way to becoming a successful investor.

Keeping your cool in times of distress and doing your research will set you apart from the majority of investors and speculators in the marketplace and should lead to durable investing success. One that your uncle and neighbor might even envy!

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