Introduction:
The best of investors make blunders. Legendary investor Warren Buffett has confessed to making bad investment decisions. The difference between successful and unsuccessful investors comes down to learning from past mistakes — or, even better, avoiding them in the first place.
If you’re a beginner, it’s totally normal to feel overwhelmed when it comes to investing. But, by identifying some common investment mistakes and learning how to avoid them, you can help yourself become less of a target for losses and completely eliminate setbacks along the way.
In this guide, we’ll discuss some of the biggest investment mistakes that beginner investors make, and the strategies to avoid them.
Mistake 1: Leaving things to the last minute
Lots of people hesitate to start investing because they believe they don’t have enough money, don’t get the market or are fearful of losing money. But, they say, time is one of the most potent tools in investing.
Why It’s a Mistake:
The later you invest, the less time your money has to grow through compounding. Even the smallest amount of money invested early will compound into anything over the course of a lifetime.
How to Avoid It:
Start as early as possible, even in small amounts. Trivial amounts like $50 or $100 per month add up over decades. Set a habit for investing using automated investing apps such as Acorns or M1 Finance.
Mistake No. 2: Market timing
Some beginners think they can purchase stocks at their lowest and sell them at their highest. Even professional investors find it difficult to do so consistently.
Why It’s a Mistake:
Market timing is next to impossible. You’re not going to wait till the “perfect” time to invest because you probably will never start. And many investors panic and sell for a loss during market downturns, losing out on future rebounds.
How to Avoid It:
Adopt a long-term approach. Rather than market timing, invest regularly (a DCA strategy, or dollar-cost averaging—investing a fixed dollar amount regularly regardless of market conditions). It smoothes out the impact of up and down markets.
Mistake #3: Investing Blindly
Getting into the stock market without a strategy is like going on a road trip without a map.
Why It’s a Mistake:
You end up not being clear on your goals, the risk you need to take, or a portfolio structure so you wind up making emotional trading decisions, over-trading, or buying/elevating assets that really don’t match your goals.
How to Avoid It:
So put together an investment strategy that consists of:
Your financial objectives (retirement, purchasing a home, growing wealth, etc.)
Your risk tolerance (the amount of risk you can handle)
Investment strategy (e.g. asset allocation strategy (mix of stocks, bonds, real estate, etc.)
Mistake No. 4: Failing to Properly Diversify Your Portfolio
Investing all your money in a single stock or class of asset is a high-risk strategy.
Why It’s a Mistake:
If your whole portfolio is locked into one stock or one industry, a downturn in that sector can eliminate your gains.
How to Avoid It:
Invest in various asset classes:
Stock portfolios (across different industries and geographies)
Bonds (Government bonds and corporate bonds)
Physical Property or Real Estate (REITs)
Commodities (gold, silver, oil)
(For automatic diversification — ETFs and Index Funds)
Mistake No. 5: Paying no attention to investment fees
Fees have a big impact and many new investors— new investors and people who have just never learned this— they tend to overlook that.
Why It’s a Mistake:
These fees may appear small individually, but when combined, they decrease your returns by quite a lot over time.
How to Avoid It:
Seek out low-cost index funds and ETFs with expense ratios under 0.5%.
So, if you have covered your long-term investments, avoid excessive trading as it results in unnecessary commission fees.
Avoid actively managed funds with high management fees
Mistake #6: Not Using Reason, Only Emotion
The two biggest enemies of investors are fear and greed. Novice investors tend to panic-sell when markets slump and buy into hype when stocks are rising.
Why It’s a Mistake:
This prevents making bad decisions, like buying high and selling low, that come from emotional investing.
How to Avoid It:
Well, if you want more, then invest in a long-term strategy and don’t be tempted to react to short-term changes in the market.
Realize that market downturns are a normal case scenario and usually offer a chance to buy.
Check your investments daily instead, review them periodically.
Error No. 7: Failing to Rebalance Your Portfolio
Some of the investments in your portfolio may outperform others over time, which may serve to skew your original asset allocation.
Why It’s a Mistake:
Your risk exposure goes up if your portfolio is overrated in one asset class.
How to Avoid It:
Check your portfolio at least twice a year, ideally twice a year.
Exit stretched positions and redeploy in underweight segments.
If your investment platform has automated rebalancing, use it.
Mistake No. 8: Ignoring Tax Consequences
Of course, many investors don’t acknowledge how taxes affect their investments.
Why It’s a Mistake:
But selling stocks, receiving dividends and capital gains all have tax implications. If you don’t prepare, your bill soon could be higher than you thought.
How to Avoid It:
Utilize tax-advantaged accounts (such as Roth IRAs or 401(k)s).
Read more: Hang on for over a year to take advantage of lower long-term capital gains taxes.
Tax loss harvesting to offset gains.
Mistake #9: Investing in Get-Rich-Quick Schemes
If an investment is guaranteed to provide high returns with no or minimal risk, it’s probably a scam.
Why It’s a Mistake:
Which is why so many newbs get caught in pyramid schemes, pump-and-dump stocks or speculative investments.
How to Avoid It:
Avoid overhyped investment strategies such as index funds, ETFs, and diversified portfolios.
Journal Editorial Report: Wall Street’s recession bogeyman. Photos: AFP via Getty/Reuters Composite.
The information contained in this article is not investment advice.
Takeaway: This is where you learn from your mistakes and keep moving forward.
Everyone makes mistakes, but smart investors will know and correct them early. As a result, you will create a solid investment foundation by steering clear of these pitfalls, which will position you for long-term success.
Remember:
Start investing as soon as you can.
Stick to the plan and focused strategy.
Re-Balance and Diversify Your Portfolio
Don’t make emotionally charged decisions or fall into investment scams.
Investing is an adventure, and experienced investors never stop learning. Be patient and informed, and above all — start investing now!