How Share Investors Can Avoid Investment Traps – 12 Useful Tips

1.     If the overall sharemarket is rising and individual stocks are also showing the same trend upwards, don’t sell too early if the price and volume is increasing. See if you can work out what is making the company’s share price rise in the first place.

2.     If a share price for an individual stock is falling just because the stock is cheap and getting cheaper by the minute it may be just the reason to exit the stock and not purchase more. Average up, never down.

3.     On the downside of the market, when you are looking at individual stocks in your portfolio, it often works to apply the 10% rule. If a stock drops 10% get out. You might be able to buy back in at a much cheaper price if the fundamentals haven’t changed.

4.     Investing in managed funds can work well for many people who don’t have the individual skills, knowledge or access to information to select stocks themselves. Research who are the best managed fund performers in town over the past 5 or 10 years and leave investing to the experts.

5.     No one ever rings a bell at the top or the bottom of the sharemarket. Always consider selling at the top of the market when volumes are high and buy shares when volumes are low and the market is waiting for a recovery.

6.     Sharemarkets generally climb by the stairs and fall by the lift well. This was certainly the case in the Chinese sharemarket in recent months.

7.     Gen Y and Z- no excuses now! Stop spending, start saving and invest in your future! Start your share portfolio today as you may not get another chance like the current climate in your lifetime.

8.     At the top of the market keep your head while all those around you lose theirs.

9.     A good rule of thumb is that when everyone is talking about investing in shares, particularly people who have no idea, it is generally time to sell not buy. Some of the smartest people who have made fortunes in their own businesses are shown to be truly naive when it comes to playing the sharemarket.

10.     While good profits can be generated from acquiring shares before they list on the sharemarket, it should be remembered that the sharemarket is a volatile and uncertain beast. Booms come and investors can accumulate great wealth. Booms disappear and can quickly wipe-out investment value.

11.     It has always amazed me that people spend a lifetime accumulating wealth then don’t do enough research on selecting the right financial adviser and know their own individual tolerance for risk when they make important investment decisions.

12.     Don’t just judge your investments by information contained in the quarterly statements you receive. Demand access to the source documents to ensure your funds are appropriately invested.


9 O’Clock

The seeds of the recovery are now sown and eventually share prices will rise as un-employment, which is often regarded as a lagging economic indicator falls. Share prices move through a period of gradual increases from 6 o’clock until about 11 o’clock as commodities increase in price, overseas reserves are rebuilt and money becomes easier, subsequently property again becomes an attractive investment opportunity.

10 O’Clock

The improving economy leads to more aggressive market highs. A frenzy of interest and speculation begins, marking the beginning of the end of the recovery phase, which peaks when the economy is booming and everyone believes the good times will never end, as overseas reserves continue to rise.

11 O’Clock

More spending on government projects and infrastructure occurs in this phase, to create jobs, which increases the demand on private sector businesses. This in turn results in employment of more staff to cope with increased production needs. Lower interest rates then prompt businesses to borrow and invest in capital projects. Well before the Clock strikes midnight, wise investors have exited shares and are looking for the next investment opportunity.

8 O’Clock

During this time, companies are forced to become leaner and increase productivity. These measures and the slowly improving economy translate into increased company profits and this gradually stimulates share prices to recover. Investors who come into the market at this level often see excellent gains in the years ahead.

7 O’Clock

A recovery from recession begins with increased government spending and a sustained easing of interest rates. Interest rates fall to historically low levels and eventually a point is reached where long term investors see value in the market and start to accumulate the better performing shares – often you don’t need to look any further than the Top 50 companies for investment selection. With a lower demand for money and interest rates falling the economy is stimulated and share prices begin to slowly rise. Cash is no longer King and the value net of inflation begins to erode.


6 O’Clock

6 o’clock marks the peak of a downward swing in the economic cycle. Investors are now either too scared, or cannot afford to borrow money and in response, interest rates slowly start falling. Individuals are now trying to pay off debt and spend less where they can, as well as trying to keep their jobs. A severe contraction in the labour market is often evident in this phase of the Clock. This can exacerbate recessionary deepening, unless correction through government fiscal and Reserve Bank monetary stimulus, and the return of business confidence becomes apparent.

5 O’Clock

Poor business confidence means that new capital ventures are postponed and Initial Public Offerings become a thing of the past. This is a time when capital is near impossible to raise and banks are not lending. Less spending and higher interest rates result in lower demand, which results in less production. Consumer confidence is at a very low level with demand for goods and services coming under enormous pressure. With fewer sales there is a squeeze on earnings, resulting in profit downgrades; and economic rationalisation becomes a hot topic in the boardrooms. The economy slows to the point where productivity stalls and then declines. When this happens for two consecutive periods the economy is said to be in a recession.

4 O’Clock

Decline into recession begins as business confidence starts to fall and consumers stop spending. Investors find little value in either shares or property and with impending trouble on the horizon fixed interest securities and cash become popular again – Cash is now King. A flight to quality assets occurs to protect what remains of an individual’s wealth. Often the gold price escalates at this time as it is seen as a store of value against worsening economic conditions. The dollar can also come under pressure to find the right level of adjustment in line with the prevailing economic ill winds relative to the rest of the world.


3 O’Clock

Before the Clock strikes midnight, savvy investors have exited shares and are looking for the next opportunity, having realised that there is likely to soon be a correction in the market. 3 o’clock sees the realisation of this correction and the consequences that will inevitably follow. Subsequently, more people are selling shares within this phase and the lack of demand triggers a sell off, a slump in share prices occurs and coupled with falling commodity prices the decline accelerates. High interest rates, still persisting at the beginning of this cycle, slow the economy and lead us into the beginning of the recessionary phase.

2 O’Clock

The rapid growth of the property and sharemarket cannot be sustained for more than a few years and eventually the economic slow down becomes apparent. Interest rates continue to increase until it is no longer viable for purchasers to continue investing in property and soon supply outstrips demand. As interest rates rise companies find it harder to make profits and this, combined with the booming property market and the fact that fixed interest investments now seem more attractive, causes share prices to begin to fall or at least plateau.

1 O’Clock

As property purchases are primarily funded by borrowing; the increased demand for funds causes the cost of funds or interest rates, to rise. The Government recognises that the economy is overheating and introduces measures to enable a ‘soft landing’, by increasing interest rates to flatten demand by consumers. Often the inflation bogey can rear its ugly head in this period and monetary policy in the form of interest rate increases can be used to keep it in check. If the Reserve Bank over corrects in this period by raising rates too quickly and too high, it can cause the market to come to a grinding halt.


12 O’Clock

Boom Time is a period of greed and excess. Consumerism is at its most extreme, full employment provides for maximum optimism and a feeling of real and sometimes imagined wealth exists, where investors believe that the favourable conditions will continue indefinitely. A whole range of new players come into the sharemarket at this level, and often regret having little or no knowledge, relying only on what others have told them- that sharemarket investment ‘is easy money’. Smart investors get out on the way to and at the top of the boom by taking their share gains and moving into real estate as part of a longer term wealth creation strategy. At this stage of the phase, the rapid increase in the demand for real estate often pushes demand above supply and results in an increase in property prices. Property prices may rise well above real value and can come back to bite you later, if you have excessive gearing.