Five dos and don’ts when investing in the stock market

[SINGAPORE] When you invest in the stock market, having the right mindset is crucial. The wrong beliefs can seriously hobble your ability to build long-term wealth. It would be a shame if that happens to you.

History shows that stocks are one of the most effective tools for growing your money and securing a comfortable retirement. Yet, many people are scared off by the market’s ups and downs, questioning whether stocks can truly deliver lasting returns. Others make impulsive decisions that sabotage their chances of achieving good long-term gains.

To help you stay on track, here are five key dos and don’ts to keep in mind when investing in the stock market.

Don’t treat the market like a casino

Far too many people approach the stock market like a get-rich-quick scheme. They chase rising stock prices, buying and selling frequently in hopes of hitting the jackpot.

But stock prices are not just random numbers flashing on a screen; they represent real businesses that produce goods and services.

When you buy shares, you are essentially buying a small ownership stake in a company. If that company performs well, its stock price tends to follow.

Unfortunately, some treat the market like a casino. These speculators often skip the research and focus only on timing the market – trying to buy low and sell high just to make a quick buck.

What they overlook is that real wealth in the stock market takes time. It requires patience for a business to grow its profits, free cash flow and pay dividends. Jumping in and out of stocks without understanding the business is like playing poker without looking at the cards – it rarely ends well.

No one can consistently predict short-term market movements. But over time, if a business continues to grow and generate more value, its stock price will typically rise in tandem.

That is why adopting a long-term mindset is so important. Take the time to understand a company’s true worth. With patience and discipline, your investments in strong, well-managed businesses will eventually pay off.

Don’t be overly sceptical when share prices rise

Another common psychological barrier to investing is excessive scepticism. When share prices rise, I often hear friends say things like “insiders must know something”, implying that someone is manipulating the stock behind the scenes.

Because there is no obvious news driving the price up, they assume foul play and conclude that the market is rigged. This belief stops them from investing altogether.

But in such situations, it helps to apply Occam’s Razor – the principle that the simplest explanation is usually the right one. Often, a rising share price simply reflects a healthy business.

If a company is performing well, more investors want to own a piece of it, which naturally drives the price higher. Yes, there are rare cases – particularly with illiquid, thinly traded stocks – where a single shareholder may control enough shares to influence the price. This is known as “cornering” the market.

However, in the case of large, well-traded companies such as blue-chip stocks, it is extremely difficult for any single player to manipulate prices. The market’s scale and liquidity make such scenarios highly unlikely.

So, before jumping to conspiracy theories, consider the simpler explanation: Good businesses attract investor interest, and that reason alone is what pushes prices up.

Don’t take on debt to invest

William Shakespeare once wrote in Hamlet: “Neither a borrower nor a lender be.” Though penned more than 400 years ago, this advice still holds true – especially when it comes to investing. The line warns against borrowing or lending money, as both can lead to unnecessary financial and emotional stress.

In the context of the stock market, you should avoid using leverage (borrowing money) to amplify your returns. Using debt to invest is tempting as it can boost your gains when share prices are rising.

However, the knife can cut both ways: It also dramatically increases your risk. Should share prices fall, you could face a margin call, which forces you to either inject more cash or sell your shares – often at the worst possible time.

That is the double whammy of leverage – not only do you suffer losses in a downturn, but those losses are locked in when your shares are sold at depressed prices, leaving you unable to benefit from any future rebound.

Beyond the financial risk, investing with borrowed money can also take a psychological toll. The pressure of repaying a loan can cloud your judgment and lead to emotional, irrational decisions.

Shakespeare’s timeless advice serves as a powerful reminder: Steer clear of debt when investing. Patience, discipline and investing within your means will serve you far better in the long run.

Do invest regularly using spare cash

Stories about investors with six or seven-figure portfolios often spark a mix of admiration and envy. But what many people overlook is that these investors likely started with much smaller amounts. They built their wealth gradually, step by step, over time.

The key takeaway is that just as Rome was not built in a day, neither is a strong investment portfolio. It is absolutely fine to start small by investing what you can afford.

To use the analogy of building Rome, you can start by laying one brick at a time. As your income grows through bonuses or salary increases, you can steadily channel more money into the stock market.

An effective strategy is dollar-cost averaging. This method involves investing a fixed amount regularly, regardless of market conditions. This approach removes the stress of trying to time the market and helps smooth out the impact of price volatility.

By consistently putting your excess cash to work, your portfolio will naturally grow over time. Of course, patience is essential. Building meaningful wealth does not happen overnight.

But if you stay consistent and keep investing regularly in high-quality, well-managed businesses, you will be well on your way to creating a portfolio that supports your financial goals.

Do view the stock market as a long-term wealth-building machine

Ultimately, the best way to approach the stock market is to see it as a powerful tool for long-term wealth accumulation. By investing in well-managed, high-quality companies, you give yourself the opportunity to enjoy steady capital growth over time.

Historically, stocks have outperformed other investment options like bonds, and they deliver far greater returns than fixed deposits or savings accounts. Most importantly, investing in stocks helps you stay ahead of inflation, which gradually erodes the purchasing power of your money.

Furthermore, savvy investors also harness the power of compounding – one of the most effective ways to grow wealth across generations. Compounding is simply the practice of reinvesting the dividends you earn back into the same stocks, allowing your returns to generate even more returns.

Over the years, this creates a snowball effect that can result in substantial wealth and set you up for a comfortable, stress-free retirement.

The writer is portfolio manager of The Smart Investor, a website that aims to help people invest smartly by providing investor education, stock commentary and market coverage