Investing in the stock market is not only about analyzing the figures, charts and making sense of numbers. It is also looking at the psychological aspects of trading because…. we are all humans. If we follow the herd when bad news ensues, we might be in a worse state than we are today.
In this article, I am going to debunk the common stock investing myths.
Investing Myth # 1. You can time the market
Long story short. Do not attempt to time the market. Though it is known that asset managers move the assets based on market performance, there is no evidence to suggest that doing so to time the market works.
Even if you sell before the price falls, you may miss out on market corrections later on. Which you don’t know when it will happen, or when the news might change to become a positive one.
There is a fallacy that strong economies equates to strong stock market performance. When the economy is doing fine, we consumers are more willing to spend and the companies bottom line will improve. However, we must treat the stock market as a “leading indicator”. This means that the stock market rise and fall in anticipation of future events and not as a response to current events.
Instead, we investors will have a better chance if we are able to make moves before the market correction. For example, go in when the market is depressed. It is “too late” to go in when the market starts to correct itself.
We cannot base our investment decisions on P/E ratios alone. As per Investopedia, the price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
As investors, we have to look at all 3 P/E ratios: Current, Trailing and Forward ratio.
It is recommended to look at the Forward Ratio more heavily as we want to know what is going to happen in the future. However, the disadvantage is that the estimates given by the analysts might be subjective.
Looking at the trailing P/E ratio is the most objective as it derives from historical data. However, the company’s past performance does not say anything about the future behaviour.
Also look at the P/B ratio and the EV/ EBITDA. If there are low, then it is a good indication that the stock is undervalued.
Investors should look at the consistency of the dividend payments. Is it increasing its dividends every year? Is the dividend payout at a consistent level?
Also to look at the yield. The average dividend yield is between 2% and 5%. If the yield is too high, it could mean that it is not sustainable and the payout might be slashed.
Investing Myth #5. Best is to buy and hold
As you may know by now, what goes up must come down. The same thing applies to the stock market. If you simply buy and hold the stocks, you won’t be able to benefit from the changing economic conditions.
Should have a regular evaluation of your portfolio and ask yourself if the asset allocation is still appropriate for you.
Andronika is borderline mental. To prevent causing distress to those around her, she has decided to set up this personal blog as an outlet and connect to like-minded people. When she is not working on her blog, you can find her with catching up on her never-ending summer reading list, working on her barre moves or taking a siesta.
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