When you try something new for the first time, you’re likely to make a few beginner mistakes. After all, learning is a process, and trial and error is an important part of that painful – yet necessary – process.
And when it comes to investing, you may be hesitant for a variety of reasons. There’s simply too much to think about. Moreover, you’ve probably heard horror stories of people who lost a lot of money in stocks because they didn’t know what they were doing.
That being said, you should not be discouraged. After all, investing in assets can prove to be a mighty and effective strategy to increase your money and accumulate wealth. As with every new skill you’re trying to develop, learning the basics is usually a great way to start.
In order to decrease the chances of you losing money with your investments, here are some helpful tips on how to avoid rookie investing mistakes:
Fees Aren’t Being Explained Properly
Remember that the less you pay in fees, the more money you have to invest into profitable assets. Do your homework so you know exactly what you’re getting into in terms of costs. The expense ratio, which is the fee the fund charges to pay their fund managers and other administrative costs, is a very common investment fee.
In addition, you’ll also have to take a look at any commission fees, advisory fees, and if a fund has a load fee. The latter can be charged when the fund’s shares are acquired (font-load fee), progressively over time, or when the shares are sold (back-load fee). Therefore, you should not only know the size of those fees, but also when they’re charged.
Fees are normally deducted from your brokerage account. When it comes to expenses, you’ll want to know when the fees are determined, calculated, and charged. I realize that all of this can be very confusing, so don’t hesitate to sit down with a licensed financial advisor or contact the brokerage or trading platform to set up a one-on-one Q&A session.
There’s a lot to think about, but there’s no reason to be put off by fees. The days of needing a couple thousand dollars to get started are long gone. There are currently a few investment apps that need little (or no) money to start an account and have little to no costs. Check out micro-investing applications like Acorns or Stash, which cost $5 to get started and $1 per month for accounts with less than $5,000. Robinhood is a free trading program that does not need an initial investment and charges no commission fees.
Not Having a Strategy
You may understand the importance of investing in terms of increasing your money, but at the same time you’re wondering why you’re investing in the first place. In order to assess how investing can help you achieve your goals, use an investment calculator. Do you wish to put your investment gains toward a down payment on a house or wedding in a few years, your child’s further education, or maybe even retirement?
Once you understand how your money should be put to use, every investment decision can be structured with that specific goal in mind. Investing everything in the stock market, for example, when you need the money in six months, is probably a bad idea. This is because short-term market swings may result in a lack of money at the time you actually need it. Therefore, adopt a longer-term view when investing in the stock market.
Buying Into Something Without Researching It First
It’s easy to get caught up in the media buzz and buy a stock just because it’s the greatest thing right now. Alternatively, you might invest in a firm simply because it is one of your favorite stores and you have brand loyalty.
Even if an investment opportunity appears to be incredibly exciting and has the potential to take off, be wary if you know very little about the product or company, the industry, and its chances for future growth. While Warren Buffet’s technique of “buying what you know” is great advice when starting out, many financial experts will tell you to balance this idea with doing your homework before making any purchases. This includes investigating a company’s cash flow, financial forecast, and business strategy.
Make sure to use fundamental analysis, which focuses on basic business information such as revenues, profits, and profit margins to determine a company’s worth and potential development. Stocks can also be researched using technical analysis, which involves searching for patterns in the stock price data to detect trends.
When investing in single stocks, using both methods and keeping up with the global market and economic situations is crucial. Find a licensed investment adviser who can help if you don’t want to put in the time and effort to educate yourself on how to invest your money correctly.
Attempting to Predict the Next Big Thing
We’d all like to buy the next Amazon, Apple, or Tesla, before the stock price has taken off. The reality is, that picking the next highflyer stock is practically impossible. Several research studies have demonstrated that stock picking is a losing game. Most Wall Street experts have a very difficult time selecting the next hot stock, and they’re doing it for a living.
Instead of chasing unicorns, you should invest in a well-diversified portfolio that matches your risk tolerance. As a result, you’re more likely to stay in the market and invest for the long term, thereby putting you in a good position for success.
Selling Too Early
If you’re a rookie investor, you’re probably not used to seeing your investments lose value. The problem is that the stock market is cyclical, which means “down years” are unavoidable.
Despite the media’s best attempts to warn investors of the historical volatility of most investments, the first taste of significant losses can be difficult to swallow for both rookie and seasoned investors. Creating a detailed investing plan will assist novice investors in sticking to their approach during these moments of uncertainty.
A savings plan should contain your savings goals, investment goals, budget, and time period. You should also consider your risk tolerance and level of comfort with market volatility.
Waiting Too Long to Invest
The longer you invest, the higher the chances of success. For many adults, not starting to invest earlier in life is at the top of their list of money regrets. The more time you allow yourself, the more likely you are to reach your goals. Waiting too long to save and invest may mean either drastically modifying your lifestyle to reach the set target, or abandoning the target entirely.
Many people hold off on investing, because they are intimidated by the complexity and quantity of unknowns. And since they wait, they don’t get to fully appreciate the potential of compound interest. While their investments may still be profitable, if they had begun earlier, their investments would have increased considerably more.
If you’re not sure where to begin, try looking into your company’s retirement plan, often referred to as a 401(k). Alternatively, start an individual retirement account (IRA) and contribute a small amount every month. If you’re changing your employer, don’t forget to ask about the retirement accounts at your new workplace. Also, be sure to roll over assets from your old account if possible.
Putting Too Much Emphasis on Investment Vehicles
One of the most common mistakes investors make is focusing all of their attention on specific investing vehicles or strategies, such as hot new mutual funds, ETFs, equities, market timing, and so on. Rather than concentrating on the newest market ideas or trends, the amount of money you’re able to save and invest is significantly more important.
Before you become too focused on all the investment strategies, find out how much money you can realistically afford to invest. Start out by investing a small amount every month to get comfortable with the idea of participating in the stock market. Focus on contributing to your company’s 401(k) plan at first, before setting up a private investment account. The former is tax-deferred, which means you will only have to pay taxes once you’re retired and are able to withdraw money from it. After you’ve gained some confidence in investing, increase your contributions and learn more about the ins and outs of the stock market.
By learning about the most common rookie investing mistakes, you’ll be able to quickly identify them. As a result, you’ll most likely have a smoother ride than if you jumped head first without being aware of these blunders. Are you prepared to roll up your sleeves and get started with your investments? Good luck, and remain alert at all times!