Following the most recent bull run many people wanted to invest their hard-earned money with hopes of getting big-time with the investment profits they will earn. Apparently, with the recent down turn in markets coupled with increasing inflation rates and weakening dollar, many of these recent investors got burned.
One of the dangers of investing, especially in equities, is thinking about return or past performance. Remember that in investing, past performance is not an indicator of future returns. Although history has a tendency to repeat itself, bad returns may even be worse than past bad years, while good returns may just be a small percentage of past good runs.
Annualizing monthly returns also contribute to this danger as a month’s good performance can be hard to duplicate given the delicate conditions of the market. We cannot expect that month-in and month-out, the same assumptions and behavior will prevail. Thus we have months of panic selling and months of buying euphoria.
Another danger of investing is lack of proper knowledge in financial markets and investment instruments. Investors must do their homework and immerse themselves with the proper knowledge when participating in such dynamic markets.
Timing the bottom or the peak of runs is another danger that confronts new investors. Waiting for the bottom before coming in or waiting for the peak before unloading provides opportunity costs that will be hard to recover.
Lastly, it is so easy to enter positions by buying shares. But even before an investor should buy, he should very well plan his exit strategies, whether at a loss or with a gain. Stop loss figures must be established in the same way as target prices.
