Ask any investor who has been in the markets for a long time, and they'll inevitably have several tales of caution for new investors. No one is perfect, and all investors make mistakes after they buy ASX shares from time to time, even the likes of the legendary Warren Buffett.
But most investors will still tell you they made their worst mistakes early on in their investing careers. In many ways, these mistakes can be blessings in disguise – nothing teaches you more quickly than losing money.
Instead of making these costly mistakes yourself, hopefully, this list of three easily avoided pitfalls will help you evade them altogether.
3 mistakes to avoid when you buy ASX shares
Jumping on the next hot thing
In today's modern world, we are constantly being bombarded with information. While this can be beneficial in many ways, it can also lead to temptations for new investors that are best avoided. There's almost always a new 'hot thing' on the markets. A few years ago, it was 3D printing. Then it was battery metals, lithium, artificial intelligence (AI), and semiconductors.
There are always new and exciting technologies being developed. But that doesn't mean we should invest in them right away. New investors are particularly prone to investing in something that promises massive upside thanks to its future potential.
While some of these technologies might end up making some people rich, others might just fade away. And even if you are onto an exciting, game-changing technology, chances are you won't find the one company that ends up raking in all of the benefits. So when you're new to investing, it's probably a good idea to stick to buying ASX shares that have been around a while and are provably good at what they do.
Letting emotions decide when you buy or sell ASX shares
I get it. Investing is an unexpectedly emotional process. Parting with your cash and leaving it to the mercy of the markets can be a highly uncomfortable process, especially for new investors.
Losing that control does strange things to one's head. If you buy ASX shares one week and they drop in value the next, it can make you feel royally stupid. Likewise, buying a share just before it makes a great leap higher can make you feel like a genius. Both of these emotional reactions are natural. But they are also decidedly unhelpful and could be downright dangerous to your long-term worth.
You need to learn to suppress these emotions and not let them guide you into making a decision you will later regret. Most investors who get burned on the share market have fallen into the trap of investing emotionally.
So have a mental plan in place for your investments. Think about why you have decided to invest in a particular stock and what possible reasons you might have to sell out one day. That way, the chances of making a rash decision like selling out during a stock market crash are mitigated.
Trading stocks and not investing for the long term
Almost all of the world's best investors follow the Warren Buffett method of investing for the long term. But when you get started in investing, it can be hard to keep your eyes on the horizon and not on what's happening in your brokerage account day to day. Warren Buffett still owns some stocks that he last touched in the 1970s or earlier.
And yet many new investors think that because they are up 5% on an initial investment, it is the smart thing to do to 'take the profits off the table' and make a quick buck. When you try and time the market like this, you might get lucky a few times.
But chances are that you'll eventually make a mistake and lose a lot of money for no good reason. Warren Buffett once said this, and I think it's a great concept to always keep at the forefront of your mind when you are thinking about buying ASX shares:
I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all. Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better.
Of course, none of us are actually constrained by a punchcard system. But I think most new investors would fare far better in their early years if they assumed they were.
I always ask myself one question before I buy ASX shares: 'Is this company going to be bigger and more prosperous in ten years' time than it is today?'. If the answer is yes, then I'd be happy to buy its shares (at a reasonable share price of course) and hold them for that decade.
