Most people know they should be investing, but they don’t really know where to start. This can lead to a lot of people making common mistakes that can end up costing them a lot of money in the long run. In this blog post, we’re going to go over some of the most common mistakes people make when investing and how you can avoid them.
What are Common Mistakes People Make When Investing?
Investing can be a great way to grow your money, but it can also be a minefield if you don’t know what you’re doing.
There are all sorts of traps and pitfalls that can trip you up, and it’s important to be aware of them before you start investing your hard-earned cash.
Here are some of the common mistakes people make when investing:
Not Being Clear on Your Investment Objectives
If you were to ask 1000 investors what they were hoping to get out of the stock market, all of them would say something to the effect of, “I want to make money.”. But while making money is a reasonable end goal, being fuzzy about your objectives makes it far too easy to become an undisciplined investor.
In a professional setting, would you trust a manager who sat you down and said, “We want to be profitable this quarter.” over one that said, “We want to establish ourselves as a go-to business in every major city?”? Of course not! The team with the actionable plan will have an easier time making choices that align with the bigger picture.
So back to your investment plan. Are you putting together a retirement plan complete with income forecasts and tax planning? Are you saving money for your child or your grandchild’s college fund?
Once you’re clear on your investment objectives and goals, you’ll be amazed at how much faster the rest of your investing strategy will fall into place.
Not Researching the Companies You Buy
Imagine you’ve got a relative that wants you to invest in their food truck business in California. And because you’re being asked to lend a few thousand dollars to the food truck, you’re asking reasonable questions like, “What kind of food are you planning to make?” and “How will you find customers?”. If your would-be business-owning relative responds by saying “I don’t know.” — or worse, is someone who can’t cook or plan a menu, you’d understandably be more cautious about putting your hard-earned money into a business that’s doomed to fail.
A good company will have a lot in common with a well-managed national economy. You want to be investing in companies that have a solid track record, a place in the market, and plenty of room for future growth.
That’s why many who talk about the importance of investing for beginners will talk about the value of reading accounting statements and looking at the fundamentals. Sure, the research might be time-consuming and tedious at first, but you and your finances will be glad that you took this step when the trendy but unstable companies are on shaky ground and your portfolio is blossoming.
The adage “Buy low, sell high” isn’t just a catchy idiom. It’s quite literally the only way that you can invest, trade, or do anything entrepreneurial without losing money hand over fist. But while the saying might seem like common sense, many investors get emotional at the first sign that there’s a dip in the market.
During the COVID-19 crash of 2020, for instance, many stocks were selling for half their usual amount. And once the world adjusted and people got used to the “new normal”, those same shares either shot back up or went on to reach new highs.
Scared investors who pulled out all their funds missed out on the opportunity to purchase new shares at a discount. Meanwhile, the folks who were patient and who either held on or bought at a discount saw their portfolios come back better than ever within the span of just a few months.
It might feel counterintuitive, but there’s a reason why all the beginner investing courses will spend a few units talking about the importance of being patient. Time in the market will often beat timing the market. But you have to fight your self-preservation instincts to get the returns you want. This is one of the biggest Investing Mistakes that many new investors make.
Not Investing in Line With Your Risk Preferences
What everybody loves about Indiana Jones, James Bond, and all the superheroes is that they’re all characters who can crack jokes and be brave while facing situations that would have most people running and screaming in the opposite direction.
Although high-risk and high-reward trading has its perks, not everyone is built for that sort of investing style. And that’s okay. The important thing is that you take the time to understand your risk tolerance levels before you start purchasing shares in Speculative Startup Company X.
Are you an adrenaline junkie who loves the rush of seeing your portfolio value spike up overnight? Be prepared to see extreme ups and downs.
Does the phrase “Slow and steady gains.” speak to the deepest part of your soul? Then you may be better off taking a more conservative approach.
A mismatch between your trading philosophy and your risk tolerance levels can make your investment journey a lot harder than it needs to be. That’s why choosing an investing strategy often starts with taking the time to assess your feelings towards risk.
Not Having a Fiscal Management Strategy
Let’s say that you’ve bought shares in 10 companies. And for the sake of argument, let’s assume that 8 of those companies are unprofitable and that your share values have dropped accordingly.
If you lose $200 on all of those positions while making $2000 apiece on your profitable ones, guess who’s still going to be able to make a meaningful contribution to your retirement plan when all is said and done? That’s right, you are!
Although you want to do your research and make sure that everything is on the up and up, nobody can get their investments right every time. That’s why many financial experts will tell you that choosing the right companies is only half the battle when it comes to investing. How you manage your accounts can have as much or more of an effect on your long-term profitability and avoiding costly investing mistakes.
Holding on to Bad Positions
Before 2021, the Cleveland Browns were notorious for their long, 18-year postseason drought. That’s right. Depending on the year that a person was born, Cleveland had high school graduates, college students, and well-established professionals who had no adult memories of their football team making the playoffs.
While there’s nothing wrong with rooting for the underdog and holding out hope for your local sports team to turn it around, you don’t want to take a sports fan’s approach to your investment strategy.
Every investor can tell you about a company that had all the potential in the world. Maybe they were early movers in an industry that was poised to do big things. Perhaps they had past success speaking for them and all the capital needed to make a particularly innovative pivot.
But after a few quarters or a few years, the results simply weren’t there.
Many investors pour a lot of time and love into their market research. They look for companies that they believe in. And, if they’ve been reading the shareholder letters and learning more about the industry at large, they may believe deep down that the company has what it takes to reverse positions and become the juggernaut that it was destined to be.
However, there’s a reason why people will often advise beginning investors against falling in love with a particular company:
Each underperforming quarter and subpar year takes away from your profitability as a trader. Even if you’re only talking about a two or three percent loss year over year, you’ll be actively losing out on money that you need for your retirement funds or your tropical vacation. That’s why it’s important to set your financial targets and to be disciplined about cutting your losses and not continue to make this Investing Mistake.
Your portfolio returns will thank you for your decision-making at the end of the day.
Investing Money You’re Not Prepared to Lose
If you’re a business owner or a working professional with a well-established career, chances are that losing $100 on the stock market isn’t going to break the bank. But while $100 or $1000 might not be the end of your financial world, can you say the same about a $10,000 or $100,000 investment?
To be clear, investing isn’t the same as gambling. You can do your research, diversify, and choose companies with solid fundamentals to generate returns that blow the interest rates at your bank out of the water.
But even so, you don’t want to be in a position where you’re struggling to choose between rent money for your office space and the investment that you’re making. For starters, it can take years for a company to generate a return. And for another, even when you’ve done everything right, the possibility of losing your money is still there.
Even if you’re planning to be the most cautious investor that ever invested, it’s important to go in with realistic expectations. Don’t put money that you’ll need right away into the stock market if you want to avoid dampening your returns. Its critical that you understand that Money Saved is Money Made. If you don’t have spare money, don’t make this painful Investing Mistake.
Hopping on Trends
It seems like every year there are one or two stocks that take off and make investors say things like, “If I had invested in that, I would have been rich by now!”. In most recent years, the stock that had people ready to kick themselves was the GameStop saga.
While social media is buzzing and the returns are mind-blowing, it can be tempting to purchase shares just because you see that’s what everyone else is doing. But while GameStop went to incredible highs, those who jumped in while the trend was in full swing didn’t generate the kinds of multimillion returns that were making the news.
Don’t trade the trends and don’t purchase companies that are operating in industries you don’t fully understand. Sure, you might miss out on a few wins, but your long-term profitability will be better if you stick to your guns.
Forgetting About Your Taxes
In the rush to invest and start putting your money to work, it’s important to be aware of the tax implications that your actions may have. In 2020, for instance, many Robinhood users were shocked to discover that their taxes had increased along with their trading returns.
As an investor, it goes without saying that you want to make as much money as possible. But when you have your investment setup is up and running, it’s essential to remember that investing is a revenue stream. And, perhaps more importantly, the IRS will want to have its share of the profits.
On this site, we talk about tax planning and the fact that there are very real benefits to creating year-round tax plans. At the same time that you’re working out your investment strategy and trading rules, you’ll also want to think very seriously about what your investments could mean for your tax bill. This is the Most Costly Investing Mistakes, If not planned properly can cost you up to half of your gains if you live in California.
Trying to Get Rich Quick
It’s easy to look at all the get-rich-quick stories involving the stock market and start wanting that for yourself. After all, who wouldn’t want to become a self-made millionaire by purchasing a few shares and watching your net worth balloon up to Jeff Bezos levels?
Even so, what a lot of people don’t realize is that when it comes to investing, sometimes being the tortoise in “The Tortoise and the Hare” is your best chance to come out on top. In 2016, a janitor made headlines when people learned after his death that he had made $8 million simply by purchasing shares in good companies and leaving the money alone.
When you’re investing, it’s easy to be so focused on finding the next Amazon or GameStop that you lose a lot of money in the process. Not everyone has the skill, time, and luck needed to strike gold in the stock market. But even if you’re not an investment expert, you can still stick to the fundamentals, work out a plan, and watch your portfolio grow over time.
Putting all your Eggs in One Basket
Diversifying your investments is crucial to mitigating risk.
Don’t put all your money into one stock or one type of investment; spread it around so that you’re not too exposed if one particular investment fails.
Being Too Conservative With Your Investments
If you’re always playing it safe, you’re not going to see the kind of growth that you could be achieving. Investing involves some risk, but as long as you’re comfortable with that and have done your research, don’t be afraid to take some risks
Avoid These Common Investing Mistakes People make when investing At All Costs
When you’re new to investing, it’s all too easy to fall prey to the Common investing mistakes that we’ve just listed. And unlike a regular work setting where you can ease your way into all-around competence, investing mistakes have very real financial consequences for beginners. But armed with the tips we’ve just provided, you don’t have to get caught up in all the usual investing traps.
By taking your time and investing in fundamentally sound companies, you can invest like a pro even if you’re a relative beginner.
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