The Top 4 Mistakes Beginning Investors Make and How to Avoid Them
The following is a guest post by Hank Coleman, who is the owner and publisher of Money Q&A, a popular personal finance blog dedicated to helping its readers invest and save more for retirement.
Your first venture into the world of investing may be overwhelming. Investment experts seem to hawk different stocks, investment advice from books and blogs may seem contradictory depending on what you read, and the amount of data and charts out there is often just too much for a beginning investor to manage alone.
The Biggest Mistakes New Investors Can Make
To help you get the ball rolling, here are some novice mistakes to avoid while building your first investment portfolio:
Assuming You Need a Financial Adviser
All too often, people put off getting involved in investing beyond their employer-provided 401(k). They believe they need to have more money to afford a financial adviser to help them succeed in the stock market.
Maybe that was true a few decades ago. But, with the internet at your fingertips and the availability of robo advisors to help you invest your money, there’s no excuse for waiting to invest your money if it’s just sitting in a low-interest savings account.
Robo-advisors were designed to lower the barrier to getting involved in investing for everyday folks who want to see better returns on their money than what a traditional bank account can offer. With a robo-advisor, you don’t have to read a pile of investment guides before diving into the markets.
Investment companies build robo-advisors using extensive algorithms that determine the best possible allocations for customers’ money based on historical market trends and up-to-date market research. It also costs very little to use a robo-advising service compared to a traditional stockbroker. The fees usually range between 0.15-0.35% per month depending on your deposit amounts. And, some robo-advisors do not require a minimum balance to get started.
Getting Caught Up in the Hype
When you first start out as an investor, it’s all too easy to get caught up in the latest and greatest stocks that so-called investment experts proclaim are guaranteed good buys. Rather than funneling your money into the hottest tech stock or industry that people are raving about, stick to solid, time-tested strategies. Look for investments that diversify your portfolio and protect against large losses if something doesn’t live up to the hype.
Pulling Out of the Stock Market When It Goes South
There are many strategies for getting better returns on your investments. And, even if the market goes south for a bit, it’s important to remember that it will bounce back eventually.
Beginning investors are sometimes so risk-averse that they’d rather take the short-term losses by withdrawing from the market when it looks like things aren’t going well. They’d rather pull out their money than ride out the rocky waves and see their investments not only return to their original value but grow well beyond that amount.
If the Federal Reserve raises interest rates and the stock market dips or some global catastrophe strikes and the markets panic in the aftermath, don’t bail on your investments and squander your potential returns by fleeing to cash.
Look at your time horizon instead. When do you expect to need the money? Many will realize that they have decades before they need to use their investments. Staying in the stock market is usually the best strategy for investors. But, it takes a long-term mindset to see past the present panic.
Playing It Too Safe
If you’re relatively young (under 50 years old), then dumping all of your money into bonds may be overdoing it a bit. Bonds tend to be safer investment options than stocks and other volatile investment options, but they also offer significantly lower returns. Far too many young investors are risk adverse. They forget that they have decades to make up for any significant losses early in their careers.
Diversifying your portfolio is the most common and best advice for newer investors, and robo-advisors can help you decide the best allocation of your funds, based on your age and investment goals (i.e., retirement, saving for a down payment on a mortgage, your child’s college fund, etc.).
No Better Time to Get Started Than Today
Even if you have no background in investing or finance beyond creating a monthly budget, the plethora of valuable resources and no minimum, low-fee robo-advisors and index funds are making it easier than ever to invest like a pro.
It’s important to educate yourself and avoid novice pitfalls along the way as a beginner investor. You shouldn’t have to spend hours and hours reading investment advice and studying stock charts to be successful. You simply have to get started and stay in the market. Like the old saying…time in the market is more important than timing the market.
Did I miss any mistakes? What are some mistakes you’ve made as a young investor? I’d love to hear your thoughts in the comment section.