5 Most Frequently Asked Questions About Investments
By Pro Investivity on The Capital
As you are beginning your investing career, there must be a lot of frequently asked questions that are still left answered. So we would like to answer the 5 most frequently asked questions about investments — stock markets to be specific.
FAQs we’ll be discussing:
- Why Do Most People Lose Money in the Stock Market?
- How many stocks should I hold?
- Can You Predict the Stock Market?
- When is the perfect time to buy and sell stocks?
- Where should I invest my money?
1. Why Do Most People Lose Money in the Stock Market?
The stock market is the platform where the money from the impatient transfers to the patient. Let’s admit it — most of us are impatient, aren’t we? This makes me vulnerable to the psychological traps in investing.
We would like to earn high profits in a very short time. So, we buy and sell stocks frequently, increasing our costs such as taxes and broker commissions in the process. All these extra charges make it difficult for us to gain profit out of them.
For example, you buy a stock at $100, and the price increases to $102 within a few days. You then decide to sell it. The commissions and taxes total to $3. You made a profit of $2 (102–100) when you consider only the buying and the selling price. But in actual terms, you have lost $1 (102–100–3). While subtracting the additional costs, your return comes negative (loss).
Instead, if we had held those shares for a longer time, then there would have been a greater chance that its price will expand further. Moreover, many countries have a reduced tax system for long term investors. This would significantly decrease the tax we have to pay.
So as mentioned in the Intelligent Investor, it’s not that most people lose out because of their incompetency in the stock market. Rather it’s their impatience that’s causing their demise.
“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”
Warren Buffet
2. How many stocks should I hold?
We do like to own the “perfect” number of stocks, don’t we?
I used to own just 1 stock for the first few months of my investment journey. At that time, I had no knowledge of diversification, which is why I had just 1 stock. Only when I lost more than 30% on it did I realize how painful it was. Learn more about my investment journey here.
After recovering myself from the pain, I knew I had to expand my portfolio if I had to minimize my risk. I now have around 15 stocks in my portfolio.
So you should never hold only one stock, as you might not be able to withstand the losses (if it happens). If possible, try to buy stocks from various sectors such as from banking, manufacturing, technology, and so on.
As per Benjamin Graham, a portfolio of 15 to 20 stocks should be good for most investors as it would be diversified enough to recoup any potential losses. Simultaneously, you would still be able to manage all of your stocks.
“You must be diversified enough to survive bad times so your skill and the good process can have the chance to pay off over the long term.”
Joel Greenblatt
3. Can You Predict the Stock Market?
Wouldn’t it be cool if we could predict the stock market? Being in the era of supercomputers and machine learning, it must be possible, isn’t it?
To answer these questions, I researched several techniques that we can use to predict the prices. I found it quite surprising that none of them actually worked consistently. I could not believe that even in this generation, we are unable to do such a thing.
But wait a minute…
If someone could have actually predicted the stock market, then wouldn’t he know everything that’s going to happen? How is he yet not the richest person in the world?
I realized that the prices of stocks were determined by the people who buy or sell them. There was no way a computer or a super-genius person could know at which would people buy/ sell and at what price.
Despite some people claim to be able to predict the market, the question arises — Why isn’t he yet a millionaire? (Or billionaire in some cases). Also, why would he reveal that he knows how to predict? If he had actually found the magic formula, wouldn’t he be trying to profit himself, rather than disclosing his secret?
“Predicting the stock market is really predicting how other investors will change estimates they are now making with all their best efforts. This means that, for a market forecaster to be right, the consensus of all others must be wrong.”
Burton G. Malkiel
4. When is the perfect time to buy and sell stocks?
This is closely associated with the previous question.
Having discussed owning the perfect number of stocks, we also want to find the perfect time to buy and sell, don’t we? We would like to buy when the stocks are at the cheapest and sell them at their maximum prices. But, “How can we possibly know at which price will the market increase or decrease?”
Let’s say you had bought bitcoins in 2016. It used to cost around $500. On 17th December 2017, its price reached almost $20,000. But after only a couple of months, its price came down to less than $7,000. In such a volatile market, even if we had missed a few days, we would have incurred heavy losses.
Are you willing to take such a big risk? What if you lose it all? Would you be able to recoup later on? If you are like me, then perhaps not.
Rather, it would be much beneficial if you would buy stocks and hold them for a long period. I know, it sounds boring. But do remember that even Warren Buffet suggests us to stop timing the market. So instead of timing the market, hold your stocks for an extended time and reap its profit in the long term.
“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” — William Feather
5. Where should I invest my money?
Before answering this question, I would like to ask you a few questions. Why do you want to invest your money? How much time are you able to dedicate to your research? How much risk are you willing to take?
The more research you can conduct, the better it would be in buying the shares of particular companies. If you are able to learn about the specific companies and analyze their financial statements, then it will assist you to buy shares. Also, you will leave it for a long time.
However, if you don’t have much time to research, then you should consider investing in mutual funds. These funds are managed professionally. Additionally, money is collected from many investors to invest on their behalf.
Nowadays, you can find many types of mutual funds in the market. So you can choose as your per preference.
Benefits of mutual funds:
- They are managed by experienced investment professionals.
- Minimization of risk as your money would be diversified in many investment platforms.
- Saves your time as you won’t have to research much.
Moving on, are you risk-averse? If you are, then you could consider keeping your money in the fixed deposits or investing in bonds. Bonds are issued by companies or governments to raise money for them. In particular, government bonds are almost risk-free as they pay their interests very regularly.
Your age group should also determine the risk you take. If you are when you’re young, then you should choose the risky options as you always have years to fall back. But, if you have already started your family, then being risky might not serve you well.
“The rich invest their money and spend what is left; the poor spend their money and invest what is left.”
Jim Rohn
Originally published at https://proinvestivity.com
