Don’t Take Too Much Risk
One thing, especially with young investors, that people need to learn is to avoid taking too much risk. Taking a lot of risk can yield reward, but it can also lead to disaster. Over time, one of these disaster scenarios will come up. Even if you’ve been doubling your money every few years, if you then lose 90% of it, you’re still well below where you started.
Here are the common mistakes people make when making stock investments:
1. Don’t buy on margin. This is something for advanced professionals that have years of experience and risk management. Not only are you paying interest on this money, if the market moves against you in the short term, you will be forced out of your positions, therefore forced into selling low.
2. Avoid leveraged ETFs. Not only do these take a lot of extra risk, the way they are designed is bad for the long-term. Because they double the daily move, the ‘down’ moves count more than the up moves. For example, let’s say the basic ETF goes up 10% then down 10%. So it goes from 100 to 110 then to 99, a loss of 1. Think the inverse ETF will just be down 2? Nope. It will go from 100 to 120, then down to 96. So you’re down 4 points, 4 times worse. This Bear Market Tips website has a good article about the Dangers of Leveraged ETFs.
3. Diversify. Don’t put all your eggs in one basket. If you feel strongly about one company or one sector, then by all means overweight in it. However, don’t put ALL your money into it. That’s just plain reckless.