Investing in the stock market is both exciting and potentially very rewarding. It remains the greatest way for the average person to see a return on their money. Still, there are pitfalls that come with investing that everyone should be aware of. Knowing about the mistakes that are commonly made by other investors can help a person avoid making those same errors.
Past Performance Does Not Guarantee Future Results
TheBalance.com has a whole article on this subject alone. It is a phrase that investment gurus and mutual fund managers use all the time. It is meant to both convey something that is true, and also protect the user from legal implications of misunderstandings.
The short and sweet of what this means is that one should not rely on what an investment has done in the past to try to figure out what it might do in the future. They may want to look at those previous numbers, but they ought not use them to figure out how much return they expect on their investments going forward. It is simply a false indicator that will leave them angry more often than happy.
Take A Conservative Approach
To avoid getting overly excited and optimistic about investment returns, consider taking a conservative approach in your estimations. If the expected earnings per share (EPS) number for the next year is $1.25 per share, assume that it will be something lower like $1.10 per share. At $1.10 per share in earnings would you still want to purchase the stock? If the answer is yes, then you might have something worth actually buying.
In that example, the stock may actually hit or exceed its earnings target. If it does so and you were only expecting earnings of $1.10 per share, then you will be over the moon with how well the investment has done. However, if it does under-perform and only reaches $1.10 per share in earnings, then at least you were already prepared for that reality.
There Will Be Good Years and Bad Years
The stock market always moves up and down. Keeping realistic expectations in your mind means preparing for the downs just as much as the ups. It is entirely possible that you could have a bad year this year only to be followed by a better one in the future. Remember that always, and prepare yourself mentally for the challenging times as well as the good times.
References:
https://www.thebalance.com/past-performance-is-no-guarantee-of-future-results-357862
https://scottalanturner.com/how-to-get-started-investing-without-a-lot-of-money/
http://www.macrotrends.net/1358/dow-jones-industrial-average-last-10-years
