Pitfall 7: A Hat Too Big For The Head

Most young kids love to wear their parent's hat without realising that the hat is just TOO BIG and once they put on the cap, it will close up their face and they could not see anything. In fact, Pitfall 7 is a good chinese proverb which I often hear the old advising the younger generation when they feel that the action taken is too risky.

It's a nature that most people tend to be aggressive when they are confident in what they are doing. This include taking excessive risk without considering the exposure. If you invest beyond your risk tolerance level, you are likely not able to follow through the investment period and not able to go through the toughest period (when the market goes against you). If you invest within your risk tolerance level, you are likely to stay with it and reap the fruits of your labor.

Happy investing.....

Pifall 6: Jumping On The Bandwagon!

When I first came across investing in stock market, I often hear people around me talking about "what are the hot tips"? If you have ever been to the brokerage houses with those huge screens showing the stock movement, you will hear lotsa people talking about the so called "hot tips"! Hang on, before you place your order for the "hot counter", take a look at the below to see if it makes sense to you.

The investment which your friends or the folks in the street are talking and discussing about may not be your cup of tea! Most of the time, people are interested to get “hot tips” from friends or brokers and started punting on the specific stock. Quite often, the most promising news are only known to the senior management or important clients or investors (the "inner circle") of the company. By the time the news reach you, the stock price may have factored in the news and is bound for a correction.

Considering the above, do you still think the so called "hot tips" are reliable? As a result, DO NOT jump on the bandwagon if you just purely hearsay the news or "hot tips". Frankly speaking, unless you are in the inner circle, there is no way you can profit from the "hot tips".

Happy investing....

Pitfall 5: Late For The Party

You have a highschool party to attend for the night but you were thinking what to wear for the party till you forget about the time and ended up late and missed the fun. Imagine by the time you arrived at the party, the booze were gone and most people were in the midst of leaving the party with their respective dates after having a good time at the party dancing and celebrating.

Well, it goes the same for the stock market. Generally you should avoid buying a stock that's already had a big run-up in value, unless you have a solid reason for expecting it to keep rising. Particularly vulnerable are stocks that have received a great deal of recent media exposure. Prices of highly publicized stocks may have reached their peak and be poised for a correction. Unless you are very confident of the company’s fundamental and the future prospect for the company, it is advisable to stay on course and observe further before joining the herds. I know this is difficult but we have to be very discipline in investing. If you have a proven system to follow, just follow the system and be disciplined.

Happy Investing.....

Pitfall 4: Timing The Market

No one can predict what will happen tomorrow or even an hour later. Even the smartest in Wall Street cannot fathom the impact of the financial crisis until the tsunami hit the shore which eventually wiped out giant corporate such as Lehman Brothers, AIG and GM which used to be important pillars in the United States. At the height of the financial crisis, those who played an important roles in the market could not predict the movement of the market and they have no solutions to the crisis.

Even Warren Buffett, the investment guru who thought that market was low and bought into financial institutions in 2008 before the low of the market could not time the market well. What’s more for the street investors like us?

Happy investing....

Pitfall 3: Greed vs Fear Factor

The recent financial crisis was the best illustration of the Greed and Fear factor. In most cases, stock markets around the world are driven by Greed and Fear too! During the bull run, everyone is afraid of losing out and started jumping into the market without looking at the fundamental and this is primarily driven by Greed factor. When the market is falling like what we experienced in Oct 2007 and September 2008, everyone is gripped with fear that they started selling their stock holding. The oversold scenario caused the market to collapse and many ordinary folks in the market see their hard earned money turned into useless paper.

It is important to map out the timeline for your investment and ensure that feeling is taken out of the equation. In this case, you will not be trapped in the greed and fear factor which causes one to lose money. Map out your investment objectives and timeline and follow the plan. If you fail to plan, you plan to fail....

Happy Investing....

Pitfall 2: Low Battery In Times of Need

Imagine the battery in your torchlight is running low when you are trapped in a cave? How would you feel? I am sure you will be willing to trade anything you have to get hold of the light to get you out of the cave. In real life, keeping adequate emergency fund (battery) is very important to tie you through your crisis. Without the emergency fund, you are exposing yourself to unnecessary loss which you may suffer in the event that you need to force sell your investment to raise the fund needed. If the postions you hold is favorable, you are in good shape but if the they go against you, you are bound to suffer loss which you may not have to if you have adequate emergency fund.

Stepping On Unfamiliar Zone

Have you ever been to a complete new location and find yourself stepping on unfamiliar zone? You are not sure of the direction to take, how the weather is like and more importantly the potential risk you are facing in this new place. This inevitably exposes you to unnecessary worry and fear which resulted in unwise decision. Researching the unfamiliar zone in detail will ease your fear and prepare you for the worst.

Similarly, this applies to investment. If you don’t know what kind of investment you are investing into, then it’s better not to invest as you may not be aware of the risks you are bearing which may potentially land you in debt trap. For instance, the risk of investing into Unit Trust is different from investing into individual stock; risk of investing into land banking is different from investing into wine. It is important to know what you invested in and whether the risks associated with the instrument met your risk profile.

Before you invest into anything, learn more about that particular investment and ensure that you are comfortable with what you are getting into. Your investment experience is important as it affects your investment mindset which essentially determine if you will be successful in investment.

Happy investing....