This time of year, we tend to fit ourselves into two categories: those of us slyly chuckling as we prepare to prank our friends and those of us walking around tense not knowing where or when we’re going to get pranked. And for some stock market investors, it can feel like April Fool’s Day all year round. The stock market can be a tricky place and investors fall for the same old tricks over and over again. So in honor of April Fool’s Day, we’re letting you in on the secret so that you don’t have to be the sucker this time around, at least not on the stock market. We can’t promise to help you avoid joy buzzers or plastic-wrapped toilet seats.
“Don’t worry about fraud! That’s what the SEC is there for.”
The Securities and Exchange Commission (SEC) is the government agency that regulates stock trading and all other kinds of financial instruments. But they don’t carefully investigate every broker out there and every financial report they get. When something suspicious comes to their attention, they are the people who are in charge of investigating and prosecuting the people involved, but by then it’s usually too late for some unlucky investors. That’s why it’s important to do your own due diligence and make sure you’re using a licensed broker. You can check out the SEC website for more guidelines on how to avoid suspicious investment situations and unscrupulous financial professionals.
“This stock used to be higher – give it time and it’ll go back up!”
Anchoring bias is when we let the first piece of information we get about something become the most important piece of information. For a lot of investors, this means getting caught on the stock’s original purchase price, without even realizing it. For example, an investor bought a stock at a particular price. It then goes down and down and down. They may subconsciously feel that the original price is somehow the REAL price. They’ll find justification for the stock’s falling price and keep waiting for it to go back up when all along the company is failing and the stock was just overvalued in the first place.
“What goes up must come down”
Sometimes it’s hard to believe how consistent a stock can be. It’s easy to look at a company’s annual sales or financial reports and be sure that the stock is overvalued. While most stocks won’t ever reach share prices in the thousands, it’s possible, and stock prices can surprise you. Often, the top earners on an exchange hold the top spots for years at a time. Holding on to the idea that a stock’s luck must run out eventually, may just cause you to miss out on some great opportunities.
“You’ve got to have turnover to make money”
Believe it or not, buying and selling stocks is not the best way to make money in the stock market. It can be tempting to cash out when prices have shot up or try to get out before prices fall, but the most reliable way to make money is to just hold on. The goal shouldn’t be to guess what the market is going to do. Instead, build a stable, well-balanced, diverse portfolio. Over the short term, it will experience ups and downs and they can be unpredictable, which is why long term investing is the way to go.
“Buy! Sell! Quick!”
Sudden, dramatic shifts in stock prices are enough to throw even the most seasoned investors off their game. When something unexpected happens, it can trick you into thinking you need to respond. But you don’t. Big movements are scary: they can make us believe that there’s an opportunity we’re about to miss or that we’re about to lose money. But panicking and taking your money out of your investment is the best way to make that dire prediction come true.
So no matter what day of the year it is, let your pranks come in the form of whoopee cushions. Keep your cool and the stock market at least, won’t be able to sneak anything past you.