Episode #10 of the course Introduction to capital markets by Doha Soliman, CFA
Good morning! Today is our last day. As we wrap our capital market introduction, we’ll spend the last day talking about things you should do while investing and common pitfalls to avoid.
Rules of Thumb
Diversify, diversify, diversify! You’ve heard the old adage: “Don’t place all your eggs in one basket.” This is one of the quintessential rules in finance. Diversify between asset classes and within an asset class. This means add stocks, bonds, and other instruments to your portfolio, and within each asset class (e.g. bonds), diversify the types you’ll be trading. This is the number-one rule of investing. Memorize it, repeat it, and enforce it.
Understand that more reward usually comes from more risk. A high risk may mean high reward, but it does not guarantee it. Tread cautiously.
Buy low, sell high. This may seem obvious at first, but many people ride trends and panic at fluctuations and therefore, end up buying high and selling low.
Remember the 50-30-20 rule. It’s suggested that 50% of one’s income should go toward the necessities, such as housing and bills; 30% toward the wants, such as dining out and entertainment; and 20% toward financial goals, such as saving and investing.
Common Pitfalls and How to Avoid Them
Not having a time horizon plan. Many investors believe all investments are equal and do not account for time horizon when adding them to their portfolios. But some investments are better suited for short term, whereas others are more beneficial for medium to long term. Getting out of a long-term investment too early may be costly.
Forgetting about taxes. Investments can generate three types of return: interest, dividends, and capital gains. All three of these returns have different tax treatments based on the region one resides in. It is important to consider one’s own tax bracket (if applicable) and speak with an accountant about which investments are ideal for one’s financial situation.
Overtrading. Many novice investors get excited about the stock market and attempt to make a large profit by trading on every movement in the markets. This results in hefty trading fees and potential large losses. Have an entry price and a target exit price for an investment, and trade accordingly.
As we finish up our introduction to capital markets, I’d like to thank you for staying the course for the last ten days, and I look forward to any comments or thoughts you’ve had on this topic. If you have any questions or would like additional information, please reach out to me on Twitter or LinkedIn.
Good luck and happy investing!
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