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These are exciting times in the stock market and the dips and rises in the past few weeks have been many. Investing is neither a fine art nor an exact science, but rather lies somewhere in between.
Research shows that emotional reactions and not logic guide investment decisions of investors. A clear understanding of how markets work is essential when it comes to investing for success. Most people do not realise that a large portion of their investments is linked to stock markets, through endowment policies, retirement annuities etc.
From my experience in stock markets, I have identified certain pitfalls and common mistakes. The ones I mention in this article have the biggest effect on how you manage your own stock market portfolio.
Success or failure in the stock market is governed mainly by greed and fear. Greed is the first and most important reason for failure, the desire to get rich quickly, find the ultimate stock and beat all the odds. A healthy appetite for money needs to be tempered by sound judgment. Once you have achieved your desired growth in a particular stock (a level you would predetermine yourself) - sell it. It may not have reached its potential, but you achieved your level at which you were happy to make a return. It is when greed overtakes logic that you make a loss - by hanging on to the stock for just a bit longer, just in case!
Fear is the next most important reason for failure. That inherent fear in each and everyone of us that we can lose, can paralyse an investor and stop them acting when they should. Fear is responsible for one missing out on a good opportunity to go into the market, and as a result of fear, total panic when a market dips can prevent one from selling when necessary and cutting one's losses. Fear can be a good emotion as well; in small doses it acts as a restraint, but as with all good things, only in moderation!
Be flexible in your investment strategy - if you see that you have misjudged a particular market trend, admit your mistake and take steps to curtail the damage. If you are sure that you are on the right track, it may be better to ride out the trend. If you can suffer the short-term losses, hanging in for the long ride could ultimately increase your gains.
Investing in the stock market is an exciting journey. Mistakes will be made along the way and many lessons will be learnt. The important thing is to minimise the damage. Failure is not the falling down, but the staying down!
l Bryan Hirsch is a director of Pioneer Financial Planning. Visit www.pioneer.co.za