Everyone makes mistakes, and investing is no different, except it carries the risk of costing you large sums of money. Investing in the market can be a daunting undertaking, but the numbers do not lie?investing in the stock market will still net you better returns over the long term than keeping money in a traditional savings account.
Do not be afraid; novices and investing experts alike can fall prey to these common investing mistakes:
1. Playing day trader. It can be tempting to dress up, pretend you are Warren Buffet and play day trader with your portfolio on a slow day at work. It can be especially tempting to try this after we experience our first big gain on the markets. Unless you are an actual investment analyst, market savvy individual, or Warren Buffett himself, leave your account alone. For most of us leaving our portfolio alone will actually make us more money in the long run.
Leaving your investments alone also keeps you from experiencing panic (see below) and selling your stocks off every time the 24/7 news cycle reports a crisis or dip in the market. Keeping out of your accounts on a day to day is good for both your wallet and your sanity. Just trust us.
2. Panicking. Investing in the stock market is not for the faint-of-heart. Especially after the crash in 2008, it can be difficult not to sell, sell, sell when it looks as if the markets are about to take another dip. The worst thing you can do, particularly if you are a novice (see ?Playing Day Trader? above) is to panic and sell a great stock when the entire market as a whole had a bad day, or when a company has a few off weeks.
Depending on who you use, buying and selling stocks can cost anywhere between $4-7.95 per trade, which can get pretty expensive if you start buying and selling every time a rain cloud appears on the horizon. Keeping emotions out of your investments is just good business, but keeping sneaky panic to a minimum is the best practice of them all.
3. Not doing your homework. If you are lucky you may be able to stick your investments into a target date or winning mutual fund, get an 8% every year and be one of the success stories of how you initially invested in the market with $2500 and 40 years later retired a millionaire. If you are lucky.
Investing in the stock market is a great time to educate yourself. Be a conscientious investor and do your homework; read the prospectus, and keep up with news and current events as it relates to the companies in your portfolio. This will help you decide when to keep winners and when to cut losers.
Educating yourself can only go so far if you are not an investment professional full time. You outsource your home and car repairs; why not outsource your portfolio to a professional? It can be good practice to see a professional and rebalance your portfolio once a year. Still, you have to do your homework when selecting whom to trust your precious money with as well. There are a ton of scam artists out there. Doing your due diligence will give you peace of mind and ensure your portfolio is in the right hands.
4. Putting all your eggs in one basket. This should go without saying. I know it can get confusing reading articles about how to ?rebalance? your portfolio and which percentages of stocks need to go where. The truth of the matter is there isn?t a magic formula; just don?t be an idiot and have 60% of your portfolio in one holding or type of investment. Just like with health and wellness, moderation works for investing as well.
5. Check yourself before you wreck yourself. And by ?Check Yourself? I mean, check your ego at the door. There is a reason why many studies have proven that women make better investors than men, and that reason is ego. Even if you are confident in your knowledge of the markets, ego can blind you to both bad investments and scam artists when using a broker or asset management firm.
Why? Because ego keeps you from doing your due diligence since you think you do not need to invest your time in doing homework. You already know it all, right? Wrong.
6. Taking everyone?s advice but your own. It can be tempting to buy into the ?next big stock? or to take recommendations from your friend?s Uncle Morty?s friend Steve who works at Company XYZ. The reality is that you know better than anyone what products make it onto the shelves of your own home. If it?s good enough for you to bring home to your family, it should be good enough for your portfolio.
Retail might be a bad example, but the point I?m trying to make is this: invest in the companies you believe in. Invest in companies that you can understand both their value proposition and business model. If you put your money where your mouth is, so to speak, it can be a lot easier to whether those losses if you happen to pick a dud stock, and easier to discern the best value when making an investment.
7. Paying off your home loan before you invest. Many personal finance buffs have a zero-sum approach to paying down debt, but a mortgage is often considered good debt. You don?t necessarily have to pay off your mortgage as quickly as possible if there are other ways to maximize returns on your income.
For example: You put an extra $300 a month toward a $320,000, 30-year mortgage at 4.25%, you’d pay the loan off in 22 years. Investing $300 each month for 22 years with an annual return of 8%, means at the end of year 22 you’d have $215,615.00. If you were making your monthly mortgage payment every month for 22 years, with the extra money you made on the market you could easily pay off the remaining $126k and have nearly $90,000 dollars left. Whoa!
It is unconventional, but this investing mistake could cost you thousands.