If you’ve never been burnt on an investment, or haven’t been burnt lately, you need extra skepticism to avoid the kind of investment mistakes that can result in severe losses.
It’s unfortunate, but all too typical, that many players in risky stocks are inexperienced investors. Never having been burnt, beginning investors lack the shyness you need in investments. The world of finance—especially the stock market—makes people want to plunge right in. It may be because we’re exposed to money all day. Or, it may be because of the abstract quality of stock market transactions: often they amount to little more than muttering a few words, or pressing a few buttons. That seems different from taking cash out of your pocket and handing it to a near stranger, but the principal is the same.
Then too, investors only know if they made the right decision or the wrong one some time in the future. That’s different from swimming (make mistakes and water gets up your nose) or tennis (you can see the ball whiz by if you miss). In investing, it’s more difficult to recognize mistakes.
It pays to remember that many people begin swimming or playing tennis casually, and only later have the time and money for serious study and lessons. Then their main problem is unlearning bad habits. Investing’s also like that.
Beware buying exotics for your portfolio
An error many beginners make is to seek out the exotic. They often have a keen interest in foreign securities, high-risk technology stocks, pot stocks, investments gimmicks such as options, warrants, exotic exchange-traded funds and so on. They take little interest in the commonplace opportunities around them. They seem more interested in glamour than profit. They wind up with a collection of conversation pieces, rather than a portfolio of investments that is likely to lead them to their investment objectives.
Many investment counselors advise their new clients to invest in stocks that most of us have long been aware of, such as Royal Bank, BCE and Loblaw. The new clients respond by saying they don’t need to pay to be told to buy stocks everybody knows about. The funny thing is that often this is the most profitable advice an advisor may provide. But for those seeking advice for the first time, it’s often the hardest to follow.
Another mistake beginners make is to stress capital appreciation, to the near exclusion of dividends and interest. Many older investors, however, have learned how much more reliable dividends and interest are, compared to capital gains. Also, compounding your interest and dividends—reinvesting them—may, in the long run, make much more money for you than the sporadic high profits you earn by trading high-risk stocks. After all, high profits almost always alternate with capital losses.
Younger investors can, of course, afford more risk than older investors. But what they can afford and what will make them the most money are two different things.
Err on the side of caution (or, better safe than sorry)
The best advice we can give a beginning or returning investor is this: if you must err, try to err on the side of caution. Start off with solid stocks. That way, if you do get burned, you shouldn’t get burned badly enough to get discouraged, much less derail your retirement plans. At the same time, if your first guesses are good ones, you probably won’t make so much money that you become overconfident. By being prudent at first, you’ll make it easier to change course later. If you do find you have a flair for trading or speculating, (or the kind of temperament that goes best with GICs), you’ll be able to, shall we say, shift gears with greater ease.
Investors who start out in risky stocks often unwittingly commit themselves to an all-too-human tendency to sell high-quality stocks for small profits, and to hold off on selling losers at least till they break even. Or, to put it another way, the most costly ‘long-term hold’ you can find starts out as a short-term speculation gone wrong. Generally speaking, you’re more likely to avoid losses and make a profit if you start out with, or shift your emphasis to, high-quality stocks.
This is an edited version of an article that was originally published for subscribers in the December 6, 2019, issue of The Investment Reporter . You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter .
The Investment Reporter , MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846