Investing is a way to build long-term wealth, but simple investing mistakes can keep you from building that wealth properly and cost you your hard-earned money. Fortunately, many of these investing blunders are avoidable, but only if you recognize them and take necessary action.
With that in mind, we have listed five of the common investing mistakes to avoid, along with the solutions you can learn and do to can rectify them in time. In this way, you’ll be able to start building wealth the way you want.
#5: You didn’t start investing early enough
The mistake: CNBC identifies not investing sooner as the most common investment mistake people make and regret. In fact, 77% of millennials wish they had started investing sooner, while 76% of Baby Boomers feel the same. Such regret is understandable, as the impact of not investing early is often felt later on in life. Personal finance blogger Mike Pearson, for instance, laments the “thousands of dollars in potential investment gains” he never got. That’s because he didn’t invest over a decade ago out of fear of losing money.
The fix: It is important to invest in your future. So, do it now! An article by Petal Card on money milestones recommends that you start by instilling good saving habits into your daily routine and creating an emergency fund. In doing so, you give yourself some financial padding and better risk tolerance. This way, you can start investing with minimal fear and grow your money even more. When it comes to investing, even small amounts and a handful of stocks can be enough to help you build your fund so long as they are invested early with the right strategy.
#4: You let emotions get in the way
The mistake: A Business Insider feature on investing mistakes details how emotions can lead to impulsive decisions that’ll cost you in the long run. Too often, investors let either greed or fear (or even both) take over, and that can lead to irrational investing decisions. Case in point: In the late 1990s, investors started investing heavily in everything dot-com-related. By the early 2000s, the dot-com bubble burst, leaving depressed stock prices, great losses, and deflated investors in its wake.
The fix: Learn how to stay even-keeled and focus on research. Determine your investment goals and plan accordingly by studying the stock market. Then, identify stock-picking strategies that could steer you closer to your goals. It would also be ideal to keep yourself informed of the risks that come with every investment option. As noted in our list of ‘5 Common Challenges for New Investors’, this simple tip can help keep your portfolio from taking large hits from seemingly simple investments. You could also consider consulting with an investment coach or a financial advisor. A professional can help you make more informed investing decisions and stop you from letting your emotions rule your every investment plan and decision.
#3: You fail to diversify
The mistake: Investment app Voleo notes how some investors put all their eggs in one basket, mainly because they get too passionate about investing in a particular stock or industry. This is a risky proposition, as you’ll lose money if that stock or industry underperforms due to having no safety net in case all your “eggs” drop in value.
The fix: Spread out your investments to include different types of assets – stocks, bonds, cash, and even precious metals. You can also do cost averaging, where you buy stocks at multiple price points over time. You can then employ this same philosophy across a range of stocks to create “a nearly impregnable collection of investments.” That said, you must also avoid adding to your portfolio assets that have the same risk profile. All of these tips can help you better manage and balance out investing risks.
#2: You overlook fees and extra costs
The mistake: There are accompanying costs to investing apart from the principal you’ll use. Mutual funds, for instance, charge an expense ratio, which is simply the cost of managing a certain fund. On the other hand, buying and selling stocks will have you paying a front-end and back-end fee, on top of the commission you’ll have to pay to your broker. These investing fees and extra costs will add up and force you to spend more than what you initially planned.
The fix: As an investor, you have to be aware that certain financial products carry higher fees than others. It should be a part of your strategy to figure out these underlying costs. While potential returns are important, being diligent when it comes to these costs and fees will lead to better long-term results. And if you are going to get professional assistance, make sure to plan about their fees first. It would also be a good idea to consider using robo advisors. Compared to your typical financial advisor, robo advisors have lower overheads, don’t employ sneaky sales tactics, require much lower fees, and have little to no account minimums. By simply knowing your options, you’ll be able to prepare better and avoid several surprises.
#1: You try to time the market
The mistake: Last but not least, one of the most common investing mistakes is trying to time the market. While it is true that timing can be everything when it comes to businesses, the same can’t be said for investments. That’s because successfully timing the stock market is extremely difficult to do. Even institutional investors usually fail at it. And it’s easy to see why this is the case. There would always be way too many factors influencing the price of stocks and bonds. You can’t possibly take every single one of them into consideration. According to the CEO of HG Thomas Wealth Management, Humphrey Thomas, one can go as far as to consider the idea of timing the market as an investment strategy myth.
The fix: Instead of anticipating and reacting to the stock market up and downs, what you should do is get sound investment advice and practice patience and discipline. Have a timeline for portfolio growth and returns, but remember to keep your expectations for both short-term and long-term goals realistic. It would also be in your best interest to count on the returns of different asset classes — may it be stocks, bonds, securities, and so on. Broad returns are not only far easier to understand, but their average can also become reliable enough to provide significant long-term results when you take the time to learn them. Avoid getting swayed by any short-term hype surrounding a specific asset or stock. As an investor, you must remember that research would always be more influential in gaining returns than any fleeting investing fad or trend.
Now that you know the five most common investment mistakes, write them down, pin them up on your wall, or do whatever you have to do to avoid making these mistakes and jeopardizing your financial future. You’re already ahead of most investors in the market by reading this article, so minimize risk to your portfolio, your retirement, and your financial future by avoiding these common investment mistakes.
Of course, you could trust your assets to a robo advisor, which will automatically reduce your exposure to these risks. Some robo advisors take a set-it-and-forget-it approach (a traditional robo advisor), while others take a more hands-on style.
You can find our list of the best robo advisors on the market over here.