To invest or not to invest? If you find yourself asking that question, you’re not alone. Like most sectors, the stock market in Canada has not gone unscathed by COVID-19, as the TSX (Toronto Stock Exchange) experienced its worst one-day drop in over 80 years in March. Luckily, the market has been slowly stabilizing, making 2020 an interesting time to be an investor.
Due to the unpredictable nature of the economy, it’s extremely important to do your research and not rush into any decisions that could ultimately jeopardize your financial future. Whether you are managing your current portfolio or looking into new investments, here are three investing mistakes you should avoid:
Not understanding your investment
One of the most common mistakes made by novice investors is buying individual stocks in companies without having a complete understanding of their business model. As a buyer, your investment decisions should not be dependent on how trendy or buzzy a stock is, but rather based on the company’s overall performance and ability to generate revenue. A simple way to avoid getting caught up by hype is by diversifying your portfolio with mutual funds or exchange-traded funds, as these options tend to have lower risks. However, if you want to focus more on purchasing individual stocks from an enterprise with big growth potential, it requires in-depth research and a sound understanding of the market, which can be done with the help of a financial advisor and by doing your due diligence.
Relying on market timing
Market timing is a trading and investment strategy that attempts to forecast stock market movements and make buying and selling decisions based on predictions. Although there’s no harm in evaluating the market before you buy or sell, solely relying on market timing can be extremely risky during uncertain times like these, as predications can be inaccurate. In short, the market can’t really be predicted during economic turmoil, so market timing as an investing strategy can become a critical mistake and can often lead to greater loss than returns, especially for smaller investors.
Not understanding risk tolerance vs. risk capacity
Panic during times of uncertainty is completely normal and expected, but it is important to know your risk tolerance and capacity level before making changes to your investment portfolio. Risk tolerance is the amount of personal risk you are willing to take with your investments to secure the best return. Risk capacity is less about your comfort level with risk and more about how much you can afford to lose. Fluctuations within the stock market are normal and even with the 12% drop seen earlier this year, markets tend to recover over time. Risk capacity looks at your overall finances outside your investment and is largely based on variables like your income, age, and financial goals. If your current finances are unable to survive the time it may take for the market to recover, then analyzing your risk capacity will help you decide whether you need to liquidate your investments to avoid complete financial loss or if you can afford to wait. By assessing your risk tolerance and capacity, you can avoid making any hasty decisions that could greatly affect your financial future, since panic selling investments usually does not serve in an investor’s best interest.
To help make the investing and management process a bit easier for you, we’ve partnered with Qtrade Investor, one of Canada’s best online brokers. Qtrade Investor puts you in control, providing you with online investing tools and the ability to self-manage your investments so you can reach your financial and investment goals.
To learn more about investing with Moya Financial, contact us today!