Investing in the stock market is now easier than ever, but succeeding certainly isn’t. People have always relied on the advice of third parties to pick stocks, but you can’t make investment decisions based on some random analyst’s picks or a blog’s list of best stocks. You have to understand some of the fundamentals of business and trust your gut as well. Any piece of advice you hear should be followed by informed research. Here are some of the clear signs that you should think twice before investing.
1. Someone Told You to Invest in It
We’re not saying that you should never buy a stock or financial instrument that was recommended by an advisor, but you should know that a good portion of them will recommend products that benefit them more than they benefit you.
As a matter of fact, non-fiduciary advisors might push products because they were incentivized to do so or because they can benefit from them. This might seem devious, but it’s completely legal, and in reality, nothing is forcing them to recommend the absolute best investment for you.
If you want an advisor that will put your interests before their own, you have to make sure that they’re a fiduciary. These kinds of advisors are required to disclose any affiliation or conflict of interest. So, ask this question the minute you speak with an advisor to know how much trust you can put in their picks.
We would also advise that you start learning how to pick and buy stocksyourself so you don’t have to constantlyrely on a third person. If you need help on how to buy stocks, Wealthsimple has a great guide for beginners that will teach you everything you need to know. You’ll learn things such as how to pick winning stocks, some of the terms you’ll need to get familiar with, and a few tips for beginners.
2. You Have No Idea what You’re Investing In
Warren Buffetthas said many times that he doesn’t like investing in tech stocks because he doesn’t understand the sector. However, that didn’t stop him from becoming the most famous and successful investor in history. Investing in things you don’t understand is bad news and will again require that you always go to someone else to know what’s going on.
Investing in a stock means that you’re investing in a company, and no one would invest in a business they know nothing about. So, before you invest in something, make sure that you have at least a basic knowledge of what they’re doing.
3. You Have to Buy Now
Pressure is always a bad sign when investing. If someone tells you that you have to invest now, then you should see this as an immediate red flag.
A sound investment based on fundamentals should not have an expiry date. It will still be a good investment in the coming weeks, months, or even years from now. If someone asks you to hand them money right away, it usually means that it’s a scam or that you’re investing in a bubble. Instead, we suggest that you stick with fundamentally sound, long-term choices.
Speaking of bubbles, you should never buy something because everybody else is doing it. Some skilled investors can make a profit from short-term swings, but there’s a strong chance that you’ll buy-in when it’s too high and have to panic sell once the price starts free falling.
4. The Stock Lost a Lot of its Value
On the other hand, you have people who will assume that buying a stock at a rock bottom price is always a good idea. This is often referred to as “buying the dip”. This is another strategy that should be left to seasoned investors.
There’s also this dubious idea that stocks always pick back up. People who believe this need to be reminded of all the companies that have failed before. This is an outright lie, and just because the overall stock market tends to go in an upwards trajectory, doesn’t mean that it applies to individual stocks.
5. You Need to Borrow Money to Invest
If you have to borrow money to make an investment or use excessive amounts of leverage to do so, then you shouldn’t invest. This is best left for sophisticated investors who know what they’re doing. If you’re just getting started, stick to safer options. And, if you’re going to use leverage, use as little as possible.
6. You’re Investing Because Someone Influential is Investing
Just because a major investor is buying something, it doesn’t mean that you should. If Berkshire Hathaway decides to invest heavily in a company, it isn’t necessarily the best option for you. Investors have different needs, interests, and time horizons and their reasons for investing might be diametrically opposed to yours. This is why you need to look for investments that work for you first and foremost.
7. Stock Performance Does Not Reflect Company Performance
Investing in companies without looking at their balance sheet is a very bad idea. You have to make sure that the company’s stock is a reflection of the company’s performance and not pure speculation. A stock that is steadily rising while the company’s performance remains flat is a recipe for disaster. In addition to the balance sheet, you should check out the company’s stock-to-earnings ratio and go for stocks that are either fairly valued or undervalued.
8. You Have Received Some Obscure Tip
You should be wary of any stock that is being pushed by promoters. We’ve all seen ads calling stocks the “next Amazon” or something similar. This is usually a big red flag and a sign that a stock is being pumped. Scams will also pop up right after big events, like natural disasters, for instance. You’ll then have people pushing stocks that they claim will go up as a result. It’s always better to do your research first and only take advice from analysts you know and trust.
9. The Stock is Lagging Behind the Competition
There are times when a particular stock may be trailing behind the competition. Some will decide to invest in those because the stock is undervalued, but that’s a dangerous game. In most cases, a stock that is behind is underperforming and not undervalued. It might be because it’s poorly managed, outdated, or is dealing with management issues. So, you’ll need to either do an in-depth analysis on the stock and company or stay away from these altogether.
10. The Company Has Bad History
Companies get sued for doing bad business all the time, as they should. It’s their responsibility to protect the safety of the public. The opinion the general public has of a company is something you should always consider as an investor.
Stay away from any company that is known for mistreating clients or has been embroiled in scandals. Pay special attention to things like product defects and lawsuits. Repeated claims are usually a sign of a company that would rather cut corners than ensure the quality and safety of their products, so stay away.
11. It Doesn’t Fit Your Objectives
You should never make an investment that doesn’t match your objectives or risk tolerance. You need to stick to the strategy that works for you, even if an opportunity looks good on paper.
Is your goal to earn income or grow your capital? Or maybe you want both? Different investments offer different rewards, so, if an investment is not within your parameters, it’s usually a bad choice.
12. It Seems too Good to be True
You’ll come across a lot of skilled salespeople when looking for stocks, and they know exactly what to say to get you. If you hear someone making exaggerated claims or that a particular stock has huge upside with virtually no risk, run away. There’s a high chance that you’re dealing with a scammer or someone acting out of their own interest.
13. You’ll be Stuck in a Position
Some investments require that you hold them for a certain period before you sell. Variable annuities are an example. These will often have big penalties if you sell them before they reach their maturity date. While these can be interesting in certain situations, try to look for options that won’t be as limiting.
14. You’re Judging Based on Past Experience
Just because an investment worked for you before, doesn’t mean that it will work all the time. The SEC warns investors time and time again that past performance is not always a reliable way to predict future performance. If you’re drawn to a particular investment just because you are able to get a profit, you need to do additional research before you get into a position.
If you’re presented with an investment opportunity, make sure that it passes the test first. Go based on reliable data, and learn what you’re getting into. If you need advice, do not rely on a single source and get as many opinions as you can until you find something that fits your objectives and that aligns with your strategy.