Is it dangerous to Invest in the Stock Market?

Risk for investing in Stocks

Many people consider the stock market a risky place to invest their money, and that is the reality if the right measures are not taken. 

In the following article, we will analyze the main risk factors that can make you lose money when you invest in the stock market, all with the intention that you do not make some of the most common mistakes that I and many others have made in the past.

Well, let’s go! 

Is it dangerous to invest in the stock market?

Next, we will talk about the main risk factors when investing in the stock market, which we must avoid at all costs:

Insufficient training

Most people who decide to invest in the stock market do not have the basic knowledge necessary to do it correctly, and that carries many risks. 

On the Internet, you can get a lot of information about it, but it is common to find contradictory data depending on the source of information we consult, and we can end up even more confused.

Bad advisers

If we listen to our brother-in-law when he tells us about the hit his friend who works in the stock market has invested in, we have a problem. It is the same with the news, the gurus and the recommendations of the people in suits and ties who work in our bank.

If we are going to invest in a company, we must learn to analyze companies to know if we are making a good investment. It hurts no one to lose your money as much as it hurts yourself, so I recommend that you do your analysis independently to ensure that you are investing in the right place.

Get carried away by feelings

Buying shares of the company that has been going up in the stock for months because our co-worker and our neighbor are getting rich is usually a very bad decision. 

Following our instincts and letting ourselves be carried away by feelings will surely lead you to lose money in the stock market. The oil crisis, the .com crisis, or the financial and real estate crisis has left many people with great losses to follow this path.

What does it all lead to?

Well, all this leads us to make the wrong decisions, investing in companies without really knowing why we are doing it, and that usually leads us to buy at the wrong time. 

This happens because many investors tend to behave in a totally irrational way, allowing themselves to be carried away by the herd effect when they would have to do the opposite and make rational decisions.

Warren Buffett has a very famous phrase that perfectly defines the psychology of the winning investor:

” We should be greedy when everyone is fearful, and be fearful when everyone is greedy ” – Warren Buffett.

The masses constantly lose money in the stock market, we must act contrary to the masses in order to win. And we must not lose sight of the fact that in the financial markets we are competing with some of the most intelligent people in the world, it is a “war” to see who gets the other’s money.

How to reduce risk in investments?

So that you can control the risk of your investments, I could give you very technical and complex instructions, but I prefer to give you practical advice that you can apply from this moment. 

Later on, we will work on the issue of risk in more depth, do not worry.

Practical tips to reduce investment risk

The following tips are basic, but they are very useful to limit the risk of our investments. In addition, they are very easy to apply, so we are going to comment on them:

1. Diversify or ”not put all your eggs in the same basket”

If we concentrate our investments in 5 companies, the bad behavior of one of them can have a very negative impact on the profitability of our capital. 

On the other hand, if we decide to diversify the investment in 20 or 30 companies, we will be assuming less risk, since if any of the shares experiences a sharp decline, the impact will be much less because the risk is more distributed.

2. Training and experience

In order not to take unnecessary risks, it is essential to know how to correctly analyze the balance and data of each company. You can learn this from a theoretical basis, which you must apply in practice 

Economic cycles, the behavior of certain sectors, or identifying similar situations that have occurred in the past, allow us to take actions to limit the risk of our investments.

3. Independent managers

Independent managers are professionals specialized in managing money for people who want to invest their money but do not have the knowledge or the time to do it themselves.

In the event that you decide to go to an independent manager, I recommend that you first understand their investment philosophy and, above all, that you check the historical returns that it has obtained since its inception (at least, periods of 5 to 10 years).

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