Investing, like many things in life, is not a sure shot. There is risk involved, and there is always the possibility of loss.
To minimize the chances of losing money, here are two very common mistakes investors make when first starting out.
Mistake #1 Taking on Too Much Leverage
When it comes to investing, too much leverage is the downfall of just about everyone.
If your position is too big relative to your account size, you can find yourself in a position where you stand to lose more than the total value of your account. Physically owing you broker money is unlikely, but it is possible.
More times than not, when you have an over-levered investment, you will end up losing most of your initial investment before your broker pulls the plug via a margin call to prevent further losses.
Options, futures, and forex all have very high degrees of leverage and are thus not recommended for all investors. Reputable brokers like tastyworks make sure investors have identified their risk level and tolerance before granting access to trade risky products. With a margin account, even regular stocks can have leverage and push investors into hot water.
As a general rule, it’s prudent investing to never go beyond 2-to-1 leverage on your overall portfolio. In the long run, taking on too much leverage can and will bite you.
Mistake #2 Trying to Time the Markets
Since the dawn of time, people have tried to time the markets and failed. On a daily basis, markets are mostly unpredictable.
Although a few individual traders and hedge fund managers have figured out ways to generate consistent returns with amazing market timing, luck definitely plays a huge roll. The point is, trying to time the market is sort of like using a lot of leverage; it may work out a few times, but when it doesn’t work out, it can be financially devastating.
On a daily or even weekly basis, timing the markets is difficult. But on a yearly basis, stock prices, especially stock index prices, tend to drift up in an expanding economy. Investors should know this and invest with more of a long-term outlook rather than an short-term outlook.
After all, Warren Buffett, considered one of the best investors of all time, doesn’t use any leverage and looks at investments on a multi-year basis.