Let’s just be honest.
Investing isn’t as easy as you thought it’d be.
You know you should be doing it, you’ve seen people on tv who got rich doing it, but now that you are doing it?
You don’t know what you’re doing.
Investing doesn’t have to be this hard – you just need to know what to do (and what not to do)
There are few mistakes that most (all) beginners makes when they start looking into investing – but don’t worry – YOU don’t have to make them!
Here are 10 common mistakes that you might be making as a new investor, and what you should do instead…
1. Not Investing
I know it feels safer to save your money and keep it in the bank, and obviously you should keep money aside for emergencies. However, when you keep all of your savings in the bank, your money is subject to inflation, causing it to lose purchasing power by a rate of roughly 2% a year. This might not sound like a lot – but within 30 years (retirement age) your uninvested cash has lost more than 50% of it’s value.
Investing is the only way to beat inflation, and ensure your money retains value as time goes on. Investing is also a long game – it might fluctuate from month to month, but over a longer period of time, like a decade, you’ll start to see the money coming in.
(You can see how apple’s stock has slowly but surely gone up over the years, even if there were fluctuations)
2. Investing Money You Don’t Have
Yes, I know what I just said, but if you’re not investing because you don’t have money – that’s just smart. It’s easy to see investing as a ‘get quick rich’ scheme – a way to quit your job in a month, or even to pay off all your student loans and credit card debts. This is (sadly) not how it works, and this investing mistake is more likely to push you further into financial ruin than to save you.
You need to have an emergency fund before you start investing – that way you don’t need to rely on your investments from day one or sell them early (and low) to protect yourself in a crisis. You should only invest in the stock market with money that you can afford to lose and that you don’t need to spend for at least 10 years. You also want to make sure that all your debts are paid off before you start investing.
A good place to start is with an $1000 emergency fund and a steady stream of income coming in.
3. Waiting Too Long To Start Investing
Once you’ve paid off your debts, and you have money saved away, you’re ready to start investing. It’s that easy.
So many people try to time the market, but you can’t. There is no ‘perfect’ time to jump into investing – the market is volatile and unpredictable, so it’s better to just jump in and start learning. The market fluctuates a lot from month to month, but almost all stocks will steadily go up over the course of a few years, and keep climbing as time goes on. The sooner you get into the market, the sooner you’ll start collecting interest – especially if you are looking at low-risk stocks (which, as a beginner, you really should)
(See how Netflix’s stock goes up – unsteadily – over time. If you tried to time the market, you might not see good results for the first few months, but eventually, the stock will grow)
4. Investing Too Much Money at the Start
Investing, like anything, is a skill. It requires patience, time, practice and knowledge. These are all skills you can learn, but ones you probably won’t have when you start out.
Which is why it is not a good idea to invest your life savings on your first go.
You should start by investing small amounts while you feel out the market and start to understand the emotions and the strategies that come with investing. Especially as a beginner, you can be unprepared for the stress and the risks associated with investing, and if you invest a huge amount, you can easily make bad choices in a state of panic, and lose everything. Work your way up through amounts that make you feel comfortable, until you feel like you know what you’re doing.
Investing is a game of patience, so take your time.
5. Not Investing Enough Money To Cover Your Financial Needs in the Future
Statistically, one third of seniors have no money left after paying for essentials during retirement. I don’t mean to tell you this to scare you – I’m just showing you how important it is to plan your future if you want to avoid poverty during retirement. It’s likely, though, that you would need well over a million dollars to avoid poverty after retirement, and with inflation, it’s unlikely that you’ll save that without making investments.
Investing a couple of dollars now and then is not enough. Although it’s good to start slow, it’s important to build up to larger amounts that, realistically, can help you secure the financial future you want.
6. Not Investing With Taxes in Mind
When it comes to taxes, not all investment accounts are created equal. Taxes will make up the biggest expense of your lifetime – and if you don’t invest in the right accounts, they could also make up a big expense for your investments too. Typically when you invest, you have to pay income taxes on dividends and interest payments, and you have to pay capital gains taxes on any profits from your investments.
These tax rates can range from 20% to 40%, which is a lot of money to lose, especially if you’re saving for something like retirement. Looking into tax efficient or tax advantaged accounts, like Roth-IRA’s, can save you huge amounts of money in the long run.
Do your research into what will get you the best returns, and remember to work smarter, not harder.
7. Not Deciding How Hands on You Want To Be With Investing
One of the first things you should decide when you start investing is how much time you can give to it. If you want to be really involved in the process, and you are prepared to do a lot of research, like reading through annual reports, you might want to invest in companies that you respect and believe in. If you want a more hands off approach, you could just invest in some low cost index funds and set it to auto pilot – you can still make a 7-10% annual return this way.
If you really want a hands off approach, you can hire a financial adviser – but be prepared for the high prices they charge.
8. Not Understanding the Difference Between Gambling and Speculation
The purpose of investing is to minimise risk while maximising as much return as possible. Of course, risks are inevitable and you can never be sure of what will happen – but your decisions should still be based on facts and data. This is called speculation.
If you’re investing without doing any research, you’re basically just gambling. If you want to invest wisely and play the long game, you need to understand the rules and know what you’re doing – otherwise you might as well just be in the casino.
9. Paying Too Much in Fees for Investment
Another aspect of investing you really want to research before you get started are fees. These come in different amounts and different accounts, including brokerage and mutual funds. You need to decide how much you can afford to pay and what will best fit your style of investment and expected returns. If you don’t want to pay any fees, you can look for places where you can invest for free. (M1, is just one example)
You need to know about, and compare the different costs before you commit, and you need to decide for yourself whether the fees are worth the service. You might decide, for instance, that a service fee for a mutual fund manager is worth it, if they are making good investments on your behalf.
Just don’t get yourself into a situation where you have the potential to lose 40% of your returns in 30 years time.
10. Trusting ‘Experts’ Without Checking Their Credentials
There’s no issue with trusting financial experts – fund managers, or advisors are great. However, if you start to believe every self titled ‘internet guru’ – or anyone on a forum that thinks they’re the next Warren Buffett – you’re in trouble.
No one, (even Warren Buffett) can tell you exactly how the stock market is going to behave. If it was easy to predict, we’d all be millionaires.
One of the most important parts of investing is learning to trust your own instincts. Becoming a good player in investing takes practice – something that only time can give you. The more you learn and the more practice, the less of a mystery investing will become.
Now you know how to avoid the biggest pitfalls, you can focus on making money instead of mistakes!
Let me know in the comments if you’ve ever made one of these investing mistakes!
Crisis in the stock market – DepositPhotos