As it is often said: "All beginnings are difficult"! But with good preparation, the acquisition of basic knowledge and, above all, the observance of a few important principles in the investment business, it is not possible to eliminate mistakes completely, but at least to minimise them. This does not mean that investment risks are off the table, but precautions can be taken in this respect as well. The fascination of the various investment markets (shares, bonds, options, precious metals, etc.) as well as the desire, or rather the declared aim, to make money, harbours a few stumbling blocks here and there.
The following principles are primarily intended for "newcomers", but it is also advisable for the experienced investor to sporadically remind himself of the daily "pitfalls". Financial Behaviour and psychological investment temptations are always present.
The former "stock market guru" André Kostolany writes in his book: "If stock market speculation were easy, there would be no miners, lumberjacks and other hard workers... everyone would be a speculator".
With this in mind, it pays to keep the principles in mind. Even though the stock markets often develop their own dynamics and often do not react rationally, the following principles always have their significance:
1. No transaction without basic knowledge
Rarely does one buy a product without first "learning the ropes". This is a trait you should internalize, especially in the investment business . You can obtain the necessary basic knowledge yourself either via the Internet in the form of well-founded literature or through a trustworthy investment advisor at your bank. Get updated on the following factors: Fundamental data of the underlying security, investment category, the common trading rules, tradability of the security, markets, currency and last but not least you should also look into the fees. Other tools include charts and historical data.
2. No transaction without product knowledge
The variety of products should not be underestimated. In the case of shares and bonds , the necessary product knowledge is usually available. However, caution is advised if you wish to venture into the area of structured or derivative products (e.g. CFDs, warrants, futures, etc.). You should never buy such products if you do not understand them in detail... because there are high risks in the form of total losses or even the obligation to make additional payments! Read the "small print" in the product recommendations and get advice from a competent person at your bank. We also recommend the official brochure "Risks in Trading with Financial Instruments" published by the Swiss Bankers Association (SBA).
3. Define investment strategy
Before you start investing or inherit a portfolio, you should work out your risk profile and define an investment strategy based on it. Investing assets should not degenerate into gambling... unless you are a born "gambler" or, more elegantly, a professional trader. Follow the investment strategy over what tends to be a long period of time, even if book losses have occurred in the meantime. You can also divide a portfolio into an investment part with a longer-term look and a trading part with a short-term time horizon. So very good is a strategy... very bad is haphazard investing!
4. Good faith and emotions
Feelings are always very important in life, including sometimes the "gut feeling" in the stock market. When making investment decisions, however, try to act as consistently as possible according to rational criteria and without emotions. For more information, please read our brief overview of the "psycho-cycle" and "investor cycle". Emotional action is not infrequently driven by a state of fear or greed; "be on your guard".
Good faith can also be a dangerous advisor.
The markets are peppered with rumors and it is not uncommon for what is written or heard to be fabricated and at best only partially accurate. There are the good and the reckless market participants, the investment strategists and the market shouters. Gullibility can cost you money. Whenever possible, put the sources of information through their paces.
5. Short-term trends and hype only for traders
There is another "wisdom" on the stock market that says: "Too much back and forth makes pockets empty". It has been proven that the stock markets achieve an average annual performance of 7% to 9% over the long term; however, this is probably also a question of the respective purchase prices.
Nevertheless, there are those market participants who have become rich thanks to short-term trends. But they are the rare exception. Even the shrewd trader needs a lucky hand to a certain extent, because quick profits can vanish into thin air just as quickly.
Therefore, do not follow every hype... unless you can bear possible losses. Instead, check whether the planned investment also has good prospects in the longer term (e.g. sector allocation, sustainability, future prospects, product/service potential, etc.).
6. No cluster risks
An essential recipe for success is the diversification of a portfolio. Never fall into the mistake of "forcefully" cheapening a position on an ongoing basis and thus building up a cluster risk. Even with an initial investment, never take a cluster risk; a single position in a portfolio should not exceed a share of 5%, and in exceptional cases a maximum of 10%. When deciding to sell, it is often advisable to buy half of the planned position first. This approach is somewhat dependent on the respective stock market trend, the outlook for the market and the underlying investment idea, among other factors. In any case, always diversify well by sector, country, currency and, in the case of bonds, by maturity. If you back the "wrong horse", cluster risks can be fatal.
Diversification can also be achieved passively by adding index certificates for certain themes and markets to your portfolio. A good asset allocation is the be-all and end-all!
7. No securities purchases on credit
Almost a "mortal sin". Even if you think you can increase your profit options with credit-financed investments, you must always bear in mind that in the bad case, the losses and debts are also increased. It is not uncommon for entire livelihoods to go under with credit-financed investments. For example, never take advantage of the loan on your property. Basic rule: Only invest the capital that you can do without in the event of a total loss. To be fair, it must be added that the quality of an investment also plays a major role. There is a big difference between buying shares in Novartis and investing in a mining stock from an emerging market, for example. In any case, never buy "on credit"! Do not borrow money from private individuals, banks or anyone else for investments!
8. Loss management is also a must
Losses - even if they are only book losses at the beginning - usually lead to frustration, strain on the nerves, in short to unpleasant emotions. However, things become unprofessional when ignorance takes hold of us and we simply suppress the losses. We often don't want to admit to a wrong decision and then hold on to the positions, almost convulsively. However, loss management is much more difficult than dealing with profits. Nevertheless, the "management" of losses is also enormously important! A bear market and lower quotations for quality securities should generally be "sat out", but in the case of an obvious bad investment, a fundamental deterioration of the investment, little prospect of improvement in the overall constellation, one should also consider the realization of a loss. You can wait and hope... or in individual cases pull the rip cord. It may be better in these individual cases to limit the loss. Discuss your personal pain threshold and, if necessary, also operate with stop-loss limits. However, do not realise a loss out of emotional fear, but primarily on fundamental bases and considerations!
9. No "blind" trust in recommendations
The investment "layman" is quickly inclined to believe and trust the supposed professionals. But remember: "Even the professionals only boil with water". Nevertheless, the knowledge and experience of the professionals (investment advisors, analysts, economists, investment legends, etc.) are usually great enough to take their recommendations, tips and advice at face value. Trust is good, but control is better! Inform yourself about recommendations, look for good investment studies and check the background of non-renowned sources. It becomes especially dangerous when exorbitant returns are promised; in this case the alarm bells must ring immediately! As everywhere, there are the "good guys" and the "bad guys". Round out your picture before you implement a recommendation!
10. No "blind" trust in "providers"
The stock market world is full of "participants". Investors, speculators, analysts, banks, stock letters, investment advisors, asset managers and many others are everywhere. Online platforms are also widely used these days. Be sure to check the reputation of the providers. Make sure you also compare prices; brokerage fees, custody fees, foreign currency transactions and other fees can vary greatly. However, this comparison does not mean that you should choose the "cheapest" provider. Quality, security (including the IT platform as such) and the reputation just mentioned should be taken into account.
You should also keep a close eye on your bank advisor or asset manager. If you notice that he or she wants to place exclusively or mainly bank-owned products in your custody account or, in the case of asset management mandates, places them in your custody account, you should intervene. Here too, attention must be paid to diversification. Particularly in the case of fund investments, it is often found that primarily the bank's own/in-house products are recommended. Not that these are bad per se, on the contrary, but - as mentioned under point 6 - cluster risks must be avoided... and this also includes the one-sided concentration on products of a single provider.
From experience, we can state that a large number of providers have recognised this mistake themselves and diversify their portfolios broadly in every respect, especially with regard to fund investments... as it should be in the interests of investors!
11. Danger of addiction urges attention
The stock market or the trading mass of people are often driven by emotions and very own, psychological moments. This can never be avoided, but one can approach the individual weak points in order to avoid them if possible. Please read our separate factsheet on the subject of "Financial Behaviour".
The stock market tempts you with (high) profits every day or even from minute to minute in volatile phases. Often you unconsciously expose yourself to the pressure of missing out on something, which can quickly lead to bad decisions or bad investments. If you search for buying opportunities frantically, without thinking and without some analysis, this can quickly lead to a financial crash. If possible, do not act in overzealousness or under unnecessary, emotionally built up constraints! It is often too easy to be misled by the daily fluctuations on the stock market. Of course there are (investment) decisions that should/must be made quickly, but before that the investment object should already have been in focus.
And addiction is a disadvantage in all situations in life... including the stock market! Sporadically question your actions and the underlying drive.
We hope that we can contribute with the present, most essential principles that you do not fall into the everywhere "lurking pitfalls". Nothing is absolutely certain, but you can keep a watchful eye out for the uncertainties.
Good luck with your daily decisions.