Investing is hard. Why? Acronyms. IRA, REIT, ETF, APR, YOLO, BRB — okay, so those last two aren’t investing terms, but you get the point. Investing can be confusing and it’s difficult to understand all of the terminology and what it really means. This is why a lot of people don’t invest — ignorance and fear.
To combat this, let’s talk about some common investing mistakes that people make and how to avoid them. In other words, let’s learn from other people’s terrible experience to make investing fun and easy. Well, maybe not fun. Or easy. But let’s make it tolerable because it’s so important for wealth building. Who wants to be wealthy? Everyone.
1. Changing your strategy regularly. Before you start investing, you need to have an allocation strategy. Provided there are no glaring issues, you need to see your strategy through. It can be tempting to panic and sell when your investments take a nosedive, but don’t. The stock market goes up and down, ride it both ways.
It can also be tempting to spend a lot of time analyzing and reanalyzing your investment picks and changing them based on your whims. This is a waste of time and energy and likely won’t net you enough extra money to make up for the loss in time.
Avoid it — By switching your strategy, you can actually hurt your growth. Not to mention, trading fees can be expensive so trading often could cost you more than growth. Now, you may want to make changes down the line (i.e. investing more conservatively as you age), but stick to your strategy for the time being. And don’t sell every time the market turns. Buy low, sell high.
2. Investing in a limited amount of investments or not diversifying. We’ve all heard the warning “don’t put your eggs in one basket”. This is so true of investing. Let’s say you invest all of your money in a vegan chocolate company. Understandably, the company goes under because vegan chocolate is disgusting. Poof! There goes your money.
Avoid it — You should strive to invest your money across several investments. To make things even easier, try investing in index funds. An index fund is a type of mutual fund. It attempts to mimic a market segment — such as the U.S. stock market, bond markets, international stock markets, etc. It’s diversification in one fund!
That said, don’t put all of your dollars in one index fund. You want to get a good mix of investments. That might include: U.S. and international markets, real estate, bonds, etc. Diversify yo’ investments, ya dig?
3. Allowing fear and emotion to dictate your investing decisions. As I said before, the market WILL go up and down. Thankfully, it continues to trend up over the long term. Freaking out and selling every time the market fluctuates will keep you from building any real wealth.
On the other hand, sometimes stocks just really suck. They completely tank and some investors are not willing to take a loss so they continue to ride it down. If it isn’t working and an investment just won’t come back up, you need to let it go (sell it). I know it’s rough and no one wants to accept a loss. But that’s life. Deal with it and move on.
Avoid it — While money is emotional, investing cannot be. Make decisions based on logic and be rational. Easier said than done, I know.
You will never be a good investor if you allow fear to dictate your decisions. The market goes down all the time. It’s counterintuitive but when things are bleak, that’s the best time to purchase. As Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.” He seems to know what he’s doing, let’s follow his advice.
4. Starting later in life. If you are already older and you are just starting to invest, it’s not too late. But for those in their twenties and thirties, don’t wait! Time can do amazing things to your money if you start early enough.
Now I know that retirement seems like it’s eons away, but it really isn’t. Start saving early to make it a habit throughout your career. You don’t want to wake up 5 years from retirement and realize you never took the time to start saving for your future.
Avoid it — Save now. If your employer 401(k) has a match, you should be contributing up to it at the very least. If not, open an IRA. There are a million retirement calculators on the web, figure out your number and start saving to get there.
5. Trying to time the market or believing someone else can do it for you. The market is a mystery to seemingly everyone who is not Warren Buffett. Trying to predict its crazy mood swings will only lead to heartache and frustration. It will go up and it will go down, but don’t fool yourself into thinking you, or someone you hire, can predict when.
Likewise, it is not a wise use of your time to try to trade based on daily fluctuations. It takes a lot of time and can cost you dearly in trading fees.
Avoid it — Choose a strategy and don’t deviate regularly. You may need to make adjustments, but you do not need to make these adjustments on a daily basis. Also, don’t hire someone who says they can predict the market and make you a lot of money. Quick money is a fantasy and anyone trying to sell you on it is a con artist.
Learn from these common investing mistakes and avoid them! Don’t be driven by fear, don’t change your strategy too regularly, and start investing early.
What do you think is the biggest investing mistake that newbies (and even seasoned investors) make? Have you made any of these mistakes?