The stock market is a volatile place. It’s not uncommon to see the Dow Jones Industrial Average fluctuate by over 400 points in one day. We all know that investing money can be risky, but it doesn’t have to be if you take the proper steps and make smart decisions. After advising hundreds of investors and running my practice, I see a few patterns of mistakes that you should avoid. Here are two key points that you need to do now so your investments are set up for success well into the future.
Know what you own
In a court of law, every witness is cross-examined. The same should be said for any investment you plan to make. Before you buy a stock that your neighbor mentioned at the BBQ, take a second to verify the information. Do not invest without researching your own first. In the stock market, you should never buy a stock without knowing what it is and how much of the stock there is. In the business, knowing how much of an investment is traded is called “liquidity” and can be easily picked up by looking at a metric called market cap. For example, a company with a market cap of only $100m is very small, while companies over $5B tend to be on the larger side. If you don’t know this information, then proceed with caution when making your purchase. Companies will a low market cap may be very costly to sell, especially if you are in a hurry because there may not be a buyer on the other side when you need them most.
Know what ‘volatility’ is
Volatility is a stock market term that refers to how much an investment price changes over time. If you are investing in something like short-term corporate bonds, then this number will not mean too much because these investments tend to stay relatively stable (although they can still go up and down substantially). On the other hand, a growing biotech stock could have substantial volatility because it is a stock that may double or half in value overnight. In either case, knowing how volatile an investment’s price will help you make better decisions.
Now that you know how to avoid these mistakes, what should be done next? The stock market is a growing and dynamic place. You need to invest in the things that will keep up with this growth and a great way to get started is to get in touch with someone you know, like a trusted advisor, who can help you take the next steps.
If you like this post, feel free to reach out to me at darin@tuttleventures.com