There is no shortage of sources telling how to invest in the stock market, or where the next money winner will be.
We've been guilty of that too, but I'm here to tell you the best ways to lose thousands. Follow these simple steps and your portfolio's value will fall faster than the Chinese stock market.
- Follow the crowd
Jump on the next hot stock boosted by some marketing from a pump and dump stock market chat room and you're bound to see the value of your shares go up in flames. Nothing will set your portfolio dollars on fire faster than following the crowd – usually into some penny stock resources or energy explorer. Think of it like a huge herd, with you following – is there any grass left for you or are you likely to starve?
- Use charts to determine what to buy and sell and when
One recent study has found that over 5,000 commonly used technical trading rules were no more consistently effective in predicting trends than pure chance/luck. Warren Buffett tried technical analysis for 8 years early in his career before giving up. As he explains,
"I realised that technical analysis didn't work when I turned the chart upside down and didn't get a different answer."
If the world's greatest investor has given it a decent shot and passed, do you want to learn from his mistakes or follow them?
- Invest for the short term
Anything less than three to five years is short term. 12 months is a short term. 3 months is short term. If you're turning over stocks in your portfolio on a regular basis, or your holding period is less than 12 months, your portfolio has a more than high chance of heading backwards. We don't worry about short-term company performance. Over the long term, 10 years or more, that's when performance counts and leads to investors picking up stocks that kick up multiples of the buy in price. It's exceptionally hard to hold stocks over the long term and not become impatient or tempted to take profits – but if it was easy, everyone would be doing it.
M2 Group Ltd (ASX: MTU) has returned 2,825% over the past 10 years and that's not including dividends. All investors need to do was buy in and hold.
- Use stop losses or automated trading orders
This goes hand in hand with investing for the long term. If the stock market suffers a temporary fall, stop losses will kick you out of a company at just the wrong time. Remember that you want to buy low and sell high – and that overrides every other market theory. Especially forget this one "nobody went broke taking a profit". They didn't get rich either.
Investors who sold out of M2 during the GFC would have missed the 2,825% gains as well as dividends. Don't focus on small gains – hold for the long term and allow compounding to do its trick.
- Don't track your performance against an index
Do you know if you are beating the market? If you don't, then it's very likely that your performance is lagging the market and you'd be better off leaving your funds in a low-cost index fund. Your performance needs to include capital losses, trading costs, brokerage and managed fund fees to mention just a few expenses.
It's all well and good to boast about your winners, but at the end of the day all that counts is your overall performance compared to the market – including dividends. You should be able to find the S&P/ASX 200 (Indexasx: XJO) (ASX: XJO) total return historical data on the Standard and Poor's index website, or use a portfolio tracking tool like Sharesight.
Foolish takeaway
Follow these steps and your portfolio is bound to be deep in the red in no time at all. It's up to you to decide which path you'd like to take.
