When you begin investing for the first time, it’s highly possible you’ll make a few mistakes. But at same time, you want to minimize the number of the mistakes you make, to maximize your investment. To do this, make sure the mistakes you do make, don’t end up costing you too much money.
Another way to avoid a costly mistake is to know what kind of mistakes rookie investors typically make. This will give you a better chance of avoiding them — and losing any money.
Here are some of the more typical investing mistakes beginners make.
1. Taking a chance on an investment without getting educated
There probably isn’t a rookie investor out there who doesn’t harbor the desire to get rich in a hurry — that’s one of the primary reasons why anyone starts investing in the first place. The first task of a rookie investor, is to get the greed factor under control.
There’s always the temptation to look for the latest hot stock, or that elusive “can’t-miss” investment that will juice your investment portfolio in just a few weeks or months. But no matter how convincing the argument in favor of a certain stock is, you need to avoid it like the plague.
The universal saying is, if it sounds too good to be true, it probably is, and nowhere is that more true than what comes to investing. In reality, there’s not one person out there who has absolute knowledge of what stock is likely to take off.
With all investments come risk, and you need to educate yourself on each stock before taking that risk. Investing is not a get-rich-quick scheme, but a process of long-term wealth accumulation.
2. Going all out, and all-in
This is the first cousin of taking a chance on an investment you know nothing about. If buying into some alleged miracle stock is usually a big mistake, then the second biggest mistake is plunging in.
A common rookie mistake is not only to buy a hot stock, but to load up on it. After all, you might reason, if it’s such a great stock, why not take the biggest position you can and make the biggest profit when it takes off?
Unfortunately, that elevator is more likely to go down than up. So if you load up on the stock — hoping to make a killing — it’s a lot more likely that you’ll end up losing a big chunk of your investment money very early in your investment career.
3. Failing to diversify
Playing on the same theme, it’s never a wise idea to put all of your money into just three or four stocks. Diversification is one of the most important components to a long-term, successful investment plan.
Not only do you need to diversify between stock holdings, but you also need to keep some of your money outside the stock market. This will prevent you from losing too much money when the market drops, as well as give you other assets to tap, so you can buy stocks when they’re available at the bargain prices.
For beginner investors, the best way to diversify is through mutual funds. Index funds — based on common market indices, such as the S&P 500 — are usually an even better approach. Index funds tend to outperform managed funds, and keep you well diversified in the general market.
In addition to mutual funds, you should also hold some money in cash equivalents, such as money market funds, certificates of deposit and treasury bills.
4. Selling out of panic
Sooner or later, you’re going to experience a bear market. That’s a market that is characterized by a general decline in prices over an extended period of time. There may be times when the decline accelerates, and this can give you the impression that the bottom has fallen out of the market, and you could lose 100% of your investment.
At that point, rookie investors panic sell or dump their positions in a matter of days — or even in a single phone call. But once you do this, you will have locked in your losses, and denied yourself the ability to see a recovery in your portfolio when stock prices finally begin to rise.
It’s important to recognize and be prepared for the fact that stocks will rise and fall. Be ready to sit tight and wait out the declines if you are to have a chance of making money with your investments over the long-term.
Selling out of panic into a declining market is a guaranteed money loser.
5. Not committing to a long-term investment plan
We’ve already discussed the potential for panic selling as a rookie investor looks to bail out of the market. But there are other factors that could cause a newbie to give up investing entirely.
One of them is distraction. As a new investor — perhaps not yet fully committed to investing — it’s often easy to abandon your plans and go try something else. But if you’re to become a successful investor — the kind that builds wealth over years and decades — you’re going to have to have a plan, and stick to it throughout your life.
On-again, off-again investing doesn’t work. You have to move into the market, consistently add to your portfolio through savings, and manage your investment holdings through various kinds of markets.
That will take a long-term commitment, but the payoff will be in the form of rising wealth as the years pass. And if you’re young, now is the time to take full advantage of the compounding of investment returns.
The earlier that you begin investing — and the longer you stay committed to your plan — the greater the rewards will be.