The appetite for investment is growing in the UK, with three-quarters of millennials and Gen-Z either already investing or considering doing so in the future. This trend comes in the wake of the COVID-19 pandemic, with Brits citing poor savings account interest rates as their biggest motivation for investing.
However, budding traders must remember that investment comes with risk and profit isn’t guaranteed. So, with a new generation of investors on the horizon, ETX Capital takes a look at the common mistakes that trip up new traders – and how you can potentially avoid them.
All your eggs in one basket
With so many products available, from stocks and forex to commodities and cryptocurrencies, dipping a toe in the investment pool can be daunting. As a result, new traders may be tempted to focus their attention on a single asset and aim to become an expert.
However, while research is important, it shouldn’t come at the expense of a diverse investment portfolio. Experienced traders know that profit comes second to one aim – minimising losses.
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This means ‘hedging’ against risk – dividing your wealth among different assets to protect yourself if some markets dip. For example, if you typically trade on the stock market – and also believe the value of commodities, like gold, tend to move in the opposite direction to stocks – you may consider adding precious metals to your investment portfolio, as this could be a way of reducing losses if stocks crash.
It’s also important to remember that you can spread yourself too thin. Branching out into too many markets might lead to you struggling to fully understand the nuances of each asset.
New traders must decide how they want to balance their investment portfolio. For example, a trader may decide to have 50-percent in stocks, 40-percent in bonds and 10-percent in cryptocurrencies – in an attempt to hedge against the risk of any single asset taking a hit.
However, over time, this starting split can become lopsided. Traders react to market changes by buying and selling assets as their values fluctuate. So, the challenge may become avoiding overexposure to market risks like, for example, a 70-percent stock split in their portfolio.
This is why some investors ‘rebalance’ their portfolio – at the end of each year. They sell some of their highest-performing assets and buy more of those that are underperforming, in order to reset to their desired split.
Newest ≠ best
It’s easy to get caught up in the latest investment craze. After all, everyone wants to ride the popular rising wave that looks like it could take any tech start-up or cryptocurrency to new heights.
However, beginner traders must remember that investments do fail. Not every new business will become the next Amazon and cryptocurrencies are driven heavily by demand and adoption – meaning there is no guarantee that they will become the next Bitcoin. In fact, over 2,000 cryptocurrencies are already ‘dead’ – a number that is growing by the day.
Following the crowd and taking advice from unqualified sources like internet forums is never a successful long-term trading tactic. Instead, new traders should research the history, benefits and objectives of all of their investments and work with experienced financial experts to make educated predictions on the market.