Here are 4 things that I learned after being in the stock market for 1 year
Good morning y’all! Before going deep down into the topic I just want to tell a bit about my background.
I am a UX designer 🎨 and don't have any degree in economics, therefore this article is made by me mostly based on my experiences and insight from the books and articles that I read.
I started my investment journey last year and the first financial asset that I buy is crypto (which is really risky and not really good asset to invest to start). After considering its risk, I decided to move all of my funds to stocks and try a fresh start 😄
Ok, no more chit-chat, let’s get straight to the point ⬇️
1. Price spikes often occurred because of sentiment
Sentiment can be a rumor or news about the current global economic situation such as a recession, food crisis, and energy crisis. There is also a sentiment about corporate action such as expansion or acquisition.
Surprisingly people on the market tend to overreact to the news. They simply buy on good news and sell on the bad ones. And I think in this situation, people are more emotionally driven rather than deciding it rationally.
It's wise to really reassess the situation and decide based on the current data and our past convictions (on specific stocks that we already owned)
- Good news on certain stocks: really ask if the news really affects the company's profit, was the company have solid fundamentals? etc
- Bad news on owned stocks: Is the company still have good fundamentals? Is the problem temporary? etc.
For me personally, looking at the news don't really that effective and it's just clouding my mind, especially when decided to invest in the longer term.
2. Stock prices don’t always reflect company value but will eventually reflect its company’s real value
The stock market tends to overreact to both good and bad news. It makes some stock prices in the market just irrational and do not really reflect their real value.
The gap between stock prices and their real value is what I call opportunity, it’s either a gain or a loss opportunity. And it's basically our goal as investors to seek out the undervalued company for its future potential gain.
Potential gain/loss = company real values - current stock prices
Good company stock price will eventually reflect its real value and rise according to its growth, vice versa
3. Dividend is a guaranteed profit and it attracts people
The dividend is a shared profit that a company gave to its owner or investor, often annually.
The company which always pay out its dividend annually is more resilient than the other that don't. Logically, it's because their investor knows that they will get a guaranteed profit in the future.
If I classified it based on the amount of dividend yield that they gave, it will look like this:
- Small dividend, <3%
- Fair, 3–7%
- Huge dividend, >7%
4. Over-diversification is inefficient
Over-diversification is a reflection of confusion. I remember one day I open my stock portfolio and thinking “why the f*ck did I even buy this ABCD stock in the first place?”. I realized that I was clueless at that time and just buying some stock based on the news. thus making my stock portfolio diverse too much.
Let’s compare this A and B stock portfolio to get clearer visualization of the inefficiency that I meant.
Let’s say you have $100 amount of cash in your stock portfolio and you divided it into 20 different stocks equally, which means you have $5 in each stock.
Let’s assume that in 1 year there is 1 stock that you own that rises 100%, which will make its value rise to $10. it only gives you a return of $5 or either way I could say it’s only a 5% profit gain from your total portfolio.
Imagine if you only divided the same portfolio into only 5 stocks and that same 1 stock rise 100% in 1 year. Which will give you a huge $20 profit or the same as 20% of your portfolio. Get my point?
Diversification decreases your investment risk, Over-diversification decreases your potential gain
That's all from me, and of course, I am aware that I am still considered as a newcomer in the market and I am still learning too, so there must be some flaws.
Anyway thank you for reading 📚, and if you have any opinion just put it in the comment section, I kindly appreciate it ✨.
Hope you guys have a good day! 🌄
