Tips and Tricks

Invest Logically, Not Emotionally

Whether you choose to invest on your own or to let a mutual fund or robo-advisor manage your investments, it’s important to make sure you don’t invest emotionally.

It can be easy to let your emotions and sentimental attachments to certain companies or brands make you want to buy their shares. However, liking a company isn’t the best reason to buy its stocks. You should base your investments on a sound strategy and research.

Similarly, it can be incredibly stressful to watch your portfolio’s value plummet as the stock market drops, to the point that you want to pull your money out of the market.

History shows that the most important part of investing is keeping your money in the market. Even the worst market timer in the world outperforms an investor who regularly moves money in and out of the market.

8. Avoid Leverage

For new investors, it can be very tempting to use leverage — borrowed money — to invest, especially if you don’t have much money to start investing. This is doubly true because many brokers have made it easier to access leverage than ever before.

A 10% gain on a $100 investment is just $10. If you borrowed another $900 to invest, bringing your total balance to $1,000, that same 10% gain would be worth $100, which makes the gain much more exciting.

The important point to remember is that leverage can be incredibly dangerous. Investing is never a sure thing. You could lose some or all of the money you invest, even if you buy shares in an incredibly stable business.

If you invest $100 and your stock loses 25%, you’ve lost $25 but still have the other $75. If you borrowed $900 to increase your investment to $1,000, a 25% loss means losing $250 — more than twice the amount of money you had to invest to begin with. If that happens, you have to sell the shares at a loss and find a way to repay the remaining $150 of debt that you now owe.

Advanced investors sometimes use leverage when executing specific investing strategies, but for most individuals, and especially beginners, it’s usually best to avoid leverage.

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