There are certain things that investors should know and always remember. Ignoring these truths will inevitably hurt your portfolio somewhere down the line. In other words, investing in the stock market carries a certain amount of risk that you should always be cognizant of and respect. If you get cocky and/or greedy, the odds are that you will regret it.
1) The first thing you need to never forget is that when you buy stocks, you are really buying a company for what you believe it will do in the future. The market prices stocks on a variety of things but the biggest is what will happen in the future. A stock with a perceived good future in front of it will always do better than one with a perceived poor/bad future. This is why you will often see a company come out with good/great earnings (which are for the just completed quarter that was in the PAST) and have the stock go down because its guidance for the FUTURE is poor or below what investors wanted. The future trumps the past almost every time in the world of stocks.
2) Because the future is so important in valuing stocks, the amount of uncertainty you will encounter with every stock pick is great. Not only don’t you know how well a company will perform in the future (because it is the future after all) but you don’t know how many external factors will impact your stock(s) and the market in general. Will there be more terrorist attacks, a fire at your companies plant, a recession, manufacturing problems, lawsuits, more wars, etc.? All of those things and many more can and will impact stock prices and of course you can’t predict any of that. So, when you invest in stocks you must always remember that there is risk because of that uncertainty. Even the best looking company and a seemingly slam dunk stock pick can turn out to be a loser (short or long term) because of things you haven’t expected or anticipated.
3) Volatility is what results when unexpected things happen like in #2 above. Investors hate uncertainty and the more uncertain things are, the more stock prices will bounce around. This makes discipline one of the most desirable attributes to have for an investor. If you can’t handle the volatility which is a result of uncertainty, then investing in the stock market will be difficult for you. I am a long term investor (which means I try to keep stocks for a long period of time rather than engaging in frequent trading) because over time, that volatility evens out. I’m more confident that the stocks I pick will be long term winners than short term winners so I hope to hold my stocks for years rather than months. But whatever investing style you choose, you should have discipline to not make panic decisions. The stock market will play with your mind and you have to find a way to not let it get to you.
4) Because of the three truths listed above, you should be careful and only invest your money in a manner you feel comfortable with. If you put all your savings in stocks, your risk is higher than putting only 75% or 50% in stocks and the rest in bonds, CD’s, real estate or something else. Some investors shy away from risk while other don’t mind it and what you feel comfortable with is probably different from what someone else would choose. You must figure out what lets you sleep well at night because too high a percentage of your savings in the stock market can make people anxious and that is not a good way to live. Also your age should play a part in how much of your money is in stocks: the older you are generally means the less you should have in stocks.