Pocket Holding Meaning in Stocks, Bonds and Crypto Investing

Are you familiar with the greater fool theory? It is a money concept that describes choosing an investment not because of its fundamental value, but because the investor expects someone else (a “bigger fool”) to pay an even higher price for it.

Mistake 1: Chasing the high

Chasing the peak as a trader or investor means buying an asset that has already risen significantly in price in the hope that the price will continue to rise — what technical analysts call “buying on momentum.” But the investment may have only limited remaining upside potential. If momentum changes and the price falls, you could be among those holding the bag.

Here’s how to avoid chasing price highs as an investor:

Mistake 2: Refusing to take a loss

Another way to get caught holding the investment bag is to be stubborn – or worse, in denial – about a losing position. Stubborn traders try to recover a losing position by holding or even adding to it. That mentality can turn a small loss into a big loss.

Losses are inevitable, but you don’t have to ride them out, or worse, double them.

Stick to your investment strategy. Recognize that losses are sunk costs that you have already incurred. Use stop loss orders to automatically sell assets at predetermined prices.

Mistake 3: Ignoring asset fundamentals

Uninformed investors are more likely to end up holding the bag than those who do their homework. Buying an asset without learning about its most important features can lead you to make portfolio decisions based on hype, speculation or greed – rather than the fundamental characteristics of the asset.

Each investable asset has its own unique characteristics, so you’ll need to do a lot of your own research before adding any new investments to your portfolio. For example, if you’re buying stocks, you’ll want to study a company’s financial statements and growth prospects, plus prevailing industry trends.

Mistake 4: Over-allocation to risky assets

Some investments are riskier than others, and buying too many of the riskiest assets can leave you holding the bag. Assets that are least safe typically have the greatest price volatility, the most credit risk, and the highest potential to be a scam. Crypto investing is particularly vulnerable to such dangers.

Avoid the unwanted side effects of investing in risky assets:

Assess default risks for companies before investing in their stocks or bonds. Use strong security measures, especially when buying cryptocurrencies. Unless you know what you’re doing—or are okay with the inherent risks—avoid the most speculative investments, like meme stocks (and their crypto counterparts, meme coins).

Mistake 5: Investing in unfamiliar asset classes

You may be an experienced stock and bond investor who knows nothing about cryptocurrencies. By adding crypto to your portfolio, without even getting familiar with the asset class, you can make the bag hold.

The obvious solution is to familiarize yourself – thoroughly – with an asset class before investing any money. Stocks, bonds, cryptocurrencies, real estate, and other asset classes each have unique characteristics that you should carefully study before making any investment decisions.

Mistake 6: Buying on speculation

Pocket holding is often linked to speculative trading. Excited about the price of Bitcoin or other crypto asset? Convinced that a hot stock will continue to climb the charts? You speculate, and you may very well hold the bag.

Speculation can be extremely tempting. Here is good advice to avoid it:

Develop and consistently follow your own investment philosophy. Do thorough research on assets before you buy them. Focus on investment principles over recent price history. Make sure you don’t invest based on emotions.

Mistake 7: Falling for pump-and-dump schemes

A pump and dump scheme is a classic example of an investment scam that can leave unsuspecting investors holding the bag. The “pump” occurs when malicious actors pump up an asset to artificially inflate its price, and the “dump” occurs when the same malicious group suddenly sells their significant holdings—causing the price to collapse for everyone else.

No one likes to fall victim to pump-and-dump schemes. (Nor is their crypto counterpart, the “pullback,” in which a coin’s developers will hype it up, then suddenly abandon or shut it down, leaving unsuspecting investors holding the bag.) You can minimize this risk by being skeptical about investment hype, through your own investment research, and generally avoiding the most speculative assets.

Mistake 8: Overconcentrating your investment portfolio

If you’ve ever been advised to diversify your investment portfolio, you know it’s partly to ensure you don’t hold too much of the pocket if a stock, industry or asset class has a change in fortune. Overconcentrating your portfolio is risky because it creates too much exposure to single trends and events that can produce unwanted losses.

The opposite of overconcentration is diversification – the proverbial “spread your eggs among many baskets” strategy. For example, even if you are only passionate about crypto, you can still diversify by investing in a mix of first generation coins, altcoins, crypto stocks and crypto exchange traded funds.

Mistake 9: Succumbing to FOMO

The fear of missing out—or FOMO—is real, and it can cause you to make regrettable investment decisions. If you’ve ever berated yourself for not investing in a hot stock years earlier, you may be tempted to invest without doing proper analysis or considering the associated risks. But watch out for FOMO, so you don’t get stuck with the bag.

The best ways to fight investment FOMO include:

Make (and follow) an investment plan. Avoid impulsive decisions. Don’t just follow the crowd!

Mistake 10: Ignoring the risk of confirmation bias

Sometimes we are our own worst enemies—even as investors. Confirmation bias in investing occurs when you only evaluate and value information that supports your existing hypothesis, even if you come across credible information to the contrary. Everyone can be affected by confirmation bias, but doing so can result in you holding onto an unwanted investment bag.

How to avoid confirmation bias as an investor:

Strive to evaluate information sources objectively. Seek diverse perspectives and opinions. Don’t be afraid to challenge old assumptions.

The bottom line

If you are an active trader or investor, you will probably be caught holding the bag at some point. Investing presents unavoidable financial risk that can be mitigated but not completely eliminated. But you have strategies—such as developing a diversified portfolio strategy, doing your own research, and not buying on impulse—to mitigate bag-hold events (and the damage caused by an individual bag-hold event). reduce.

Stay focused on money goals that are meaningful to you, and don’t get caught up in any FOMO madness. The market may be looking for a bigger fool and want to unload an empty bag.