When you start investing, your goal is likely to build your wealth. Throughout your investing lifetime, you’ll see wins and losses. You will also make some mistakes.
With so many investment options available, you need to do your due diligence to ensure you do not make a costly mistake and learn how to avoid making the same mistake many times over. The first step is to simply be aware of common mistakes and turn the knowledge into your advantage.
What Are Common Mistakes Made By Investors?
While some people like to only learn from their mistakes, it is not a path suggested for investments. While you absolutely should learn from a mistake you do make, you should take preventive measures and do your research to make the best investing choices out of the gate.
Not Investing at All
Many people put off investing for a variety of reasons, everything from not knowing where to start, not having enough money, thinking their savings account is enough, or simply just waiting until the market is “right.” No matter your reason, it’s always a good idea to start investing your money. If you do not start investing you are leaving money on the table and preventing yourself from acquiring future wealth.
As a new investor, a great place to start is reaching out to your employer to inquire about a retirement savings plan. Many offer employer-sponsored 401(k)s with a match. Putting a percentage of your paycheck aside for retirement, no matter your age, will only help your financial future. And a company match is free money just sitting there for you to take advantage of.
If you do not have employer-sponsored retirement savings, consider reaching out to your bank to inquire about the different retirement savings accounts they offer. You can also consider robo-advisors. They will gauge your risk tolerance with a quick questionnaire and help you test the waters.
Not Having Clear Goals Identified
I’m sure you’ve heard the phrase “Begin with the end in mind.” This habit is one you should always start with when you begin investing. After all, if you are unsure of where you’re going, how are you going to know when you get there?
Start by identifying your short-, medium-, and long-term investment goals. Write them on paper and make sure they are realistic. Only then can you properly plan for the steps needed to help you reach each goal.
Not Doing Enough Research
You are likely thinking about investing if you are reading this blog. While it’s a great place to start you’ll need to do research about each investment you are considering.
The first thing you will want to contemplate is what a realistic return is for that investment. Make sure your goals align with the investment, and that you’ve found a trustworthy investment vehicle. If you do not fully understand the investment, do not invest your hard-earned money into it.
Ask questions. Do research. Take heed of any red flags you are sensing. Keep looking until you have confidence in the investment before going forward.
Having Too High of Expectations
When you set your goals, as mentioned above you should make sure they are realistic. Be sure throughout the entire time you are investing that you gut-check your expectations. Your portfolio will not make you wealthy overnight. It takes a long-term, consistent investment strategy to build wealth.
Investments are not lottery tickets. Investing a few dollars will not turn into thousands (or millions) overnight. Instead, make investments based on facts and research. Understand the expected returns, and remember a loss is always possible.
Not Reviewing Your Investments Often Enough
As your investments, and wealth, grow you should continue to monitor your investments. Do not keep your investments on autopilot. Instead, set aside time each year to review your investments and the performance of each. You can adjust your portfolio as needed to make sure you are on track for hitting your targets.
Not Diversifying Adequately
Time for another wise idiom – don’t put all your eggs in one basket. This rings true for many things, and investing is one of them. Failing to diversify your portfolio can put your investment at risk. Proper diversification is a vital risk management tool that can lower your portfolio risk and help increase your return overall.
Buying High/Selling Low
The stock market is going to have fluctuations. Stock prices change daily, and many factors can affect them. Conflicts like war, economic instability, natural disasters – the list goes on and on with events that can cause market volatility.
If the stock market takes a downward turn, do not panic and sell your investments for bottom dollar. Now is not the time to pull all your money out and place it into bonds or other “safer” investments. Instead, ride it out or consider investing more at this lower price point. The market will eventually recover, so take a breath and take a step back.
Stocks rise and stocks fall. There is no way to predict when and which stocks will be impacted. Instead of panicking at a downturn, stay the course. Tune out any negativity, turn off the tv, don’t read the news. Market volatility is not anything new and it is not going anywhere. It is a natural part of the investing process, so continue to look at the future and wait for the market to improve.
Trying to Time the Market
Successfully timing the market is incredibly difficult. Thinking you can beat the market is an error that could be costly. The reality is that there is no way to time the market to create the largest returns.
Instead, have a diverse portfolio with your end goal in mind. Make sure that you are hitting your targets and adjust as needed to keep on track for your future financial wealth. Keeping steady is the key to being successful.
Picking Investments With Too Many Fees
While paying fees on your investments and portfolio might not make or break your financial future, it can alter your returns. The higher your fees, the less cash you have over time.
While fees are unavoidable in investing, you can reduce your fees and costs in your portfolio. You can do so by picking a commission-free brokerage, investing in low-cost index funds, and understand the specifics of your accounts to look for hidden fees.
Reacting to Media Speculation
The purpose of the media is to keep us informed about the happenings around us and around the world, but without evoking emotion, would you tune in?
News and media outlets agitate fear, greed, and impulsive actions. Reacting to any of these media strategies can alter your financial wealth. The best thing you can do is to not react to media speculation and continue to keep your investments on the path you already planned.
When you set your goals, you were thinking with a logical, practical mindset – at least you should have been. The idea behind investing is to help you get from A to B with your long-term financial wealth.
Do not let all that go out the window and have your emotions take hold. Fear, greed, and anxiety should not control your investing strategy. Instead, continue to focus on the larger picture and what is on the horizon. If your emotions are heightened, do not react and do anything drastic. Reach out to your financial advisor for their advice and listen to their guidance.
Working With the Wrong Financial Advisor
There are plenty of so-called experts out there who are willing to guide you with opinions on how you should invest. While they might have credentials and the education that should provide them with knowledge, not every financial advisor is created equal.
As an investor, it is your job to find the best financial advisor who will make your money work for you. Do your research. Ask friends and family for referrals. Ask questions until you are comfortable with the person you are choosing to help guide you.
There are an endless amount of people out there that have hidden motivations. This is true in any profession but can be extra costly with investing. Be sure you are putting your financial future in the hands of a highly trusted professional.
Why Is Investing so Difficult?
Like all things, until you have put time and research into it you might be overwhelmed; investing is no exception. There are various investment vehicles for you to choose from and being a new investor can leave you overwhelmed with where to turn.
But you are losing money if you do not start investing. If you want to reach retirement with a nest egg, save money for a new home purchase, save for your kid’s college fund, or even just grow your personal wealth, investing is a valuable tool that shouldn’t be put off.
What Can You Do to Avoid These Common Investment Mistakes?
To avoid making common investment mistakes, start with a plan. Outline your goals and what steps are needed to get you there. Then, along the way be sure to check on your investments to make sure they are working for you. If not, adjust your portfolio, but stay the course. Leave your emotions out of it and only make decisions based on rational factors.
As an investor, you should also consider seeking help from a financial advisor to help keep you on track. They can help work through investment strategies that meet your needs. They will also be there for you in case your fear or anxiety creeps in. They will help keep you on track and keep your mind at ease.
Commit to Your Financial Future
In a perfect world you wouldn’t commit any of these common investing mistakes. But if you do, continue to learn from your mistakes to avoid them in the future. After all, many people learn more from their losses more so than their gains.
Continue to gather wisdom as you diversify your portfolio. With enough time, research, and patience, you will set yourself up for a profitable financial future.