Many Australians are fearful of the word 'shares', or 'investing' (or both). All of this fear comes down to the many anecdotal fallacies that exist, stemming from dramatic tales of people 'losing everything' that are told around the water cooler. Equally prevalent are the stories of people investing in hot penny stocks that make them millions overnight. No wonder many people feel too disillusioned to invest themselves.
The reality is that good investing sits in the middle of the two scenarios described above – it's about getting rich, slowly. A tried-and-tested investment strategy known as 'buy-and-hold' is one that I believe would suit those people who don't want to live and breathe the share market. It's amazingly simple: find a quality company that is good at turning money into more money, wait for a cheap price, buy shares and wait. Rinse. Repeat.
Many investors try to do this and fail though. Here are three reasons why:
- Buying high and selling low – This seems counterintuitive (and it is), but it is also a very common mistake and one investors of all colours are guilty of. Trying to jump onto a stock 'before it goes up more' or selling a stock 'before you lose more' may sound reasonable but is a losing strategy in the long-term (for most people). Despite this, it is still human instinct to follow these feelings when money is on the line and understanding this is an important part of being a good investor.
- Getting doubts when a stock price drops – this one is a doozy. If you find a quality company and buy some shares when you think you've found a good price, you will probably feel good if the price goes up 10% the next day. But you will feel absolutely devastated if the opposite happens (trust me). The truth is that this is a common occurrence and if you are truly confident in your company, relish the opportunity to buy more shares for less.
- Trying to time the market – it sounds easy, but it isn't and even the best investors don't try and do it. Rather than focusing on when the right time to buy in and sell out may be, just think about what price you would be willing to buy a good-quality company at. If it hits this price – buy it. If it keeps dropping – buy more. If it doesn't – keep waiting.
Foolish takeaway
If you're guilty of any of these investing sins, don't worry – most investors have been at some point (this writer included). The trick is to keep at it, master your own doubts and learn from any mistakes. Investing takes time and patience to master but tends to reward those who do handsomely.
