COMMON INVESTING MISTAKES BEGINNERS MAKE
Whether investing money to the tune of $1000, $10,000 or much more, there are basic investing mistakes that most beginners make. These mistakes can be very costly, so let’s look at investing $10,000 and how beginners can do things right.
When investing money, beginners must realize that there is no such thing as a perfect investment. You can’t have it all in any one single investment. If you are investing $10,000, you must have your personal financial objectives in mind. What are your priorities from this list: high liquidity, safety, growth, higher income, tax advantages?
Be honest with yourself and your financial planner if you have one. Investing money is all about tradeoffs, and what level of risk you are willing to accept.
Of all the investing mistakes beginners make, not knowing and sticking with your financial objectives is the worst. If you are investing $10,000, do you need instant access to your money (high liquidity) in case you have a financial emergency? If so you need a safe investment like a money market fund; and you give up growth, higher income and tax advantages.
Otherwise, you could be faced with fees and penalties, or market losses if you need to cash in at the wrong time. For example, you don’t want to be forced to liquidate a $10,000 stock investment that’s fallen to $5000 just to make your mortgage payments.
Once you have your objectives in mind, get a handle on the investment options that fit your needs before you start investing money. For example, if you are working for a living and investing for retirement, you need at tax break and should consider an IRA or your 401k plan at work if you have access to one.
If you are investing $10,000 a year you might want to put half in such a plan and the other half someplace you can get to it without penalties. Lack of liquidity is one of the most common investing mistakes beginners make.
Avoid excessive costs and fees. Investing money in stock funds and bond funds to get growth and income does not need cost you an arm and a leg. Investing $10,000 in the wrong mutual funds could cost you $500 off the top when you invest and as much as $200 or more EACH YEAR for expenses and other fees. This is one of those investing mistakes beginners make that can be costly over time.
For example, people invest in bonds to earn a higher income, and over the long-term, bonds have returned about 6% a year. You can’t afford to give a third or half of that back in charges and fees. Go with no-load index funds. There are no sales charges to invest, and investing $10,000 can cost less than $50 a year, period.
Investing money successfully need not be a part-time job, but it does require a little ongoing effort on the investor’s part. Ignoring the status of their investments is a common investing mistake beginners and many other investors make. Look at your quarterly statements when you get them. Are there charges and fees you don’t understand, are you losing money? You cannot correct a problem if you don’t know it exists.
It’s no big secret that most investors achieve stunningly poor returns on their money. Some of them even end up with drastically impaired capital, while a significant number lose theirs completely. Obviously, there is something they are not doing right. One of the most foreboding thing about investing is every mistake you make can drastically impact investment returns and may even lead to a significant loss of your capital.
Therefore, it will definitely help you a great deal to know exactly what these investors are doing wrong so you can avoid falling in the same dire investing predicaments.
Getting started, here are some of the many mistakes most investors commit:
Investing without an investment strategy or plan
Any form of investment can be likened to journeying through rough seas. An investment strategy is what serves as your navigational map which will guide you in reaching your destination. Without such a map, it may be impossible to cross the ‘rough seas’ (the market) and reach your destination (your investment objectives). You may end up somewhere else you don’t want to be.
Investing for a living or with a “Paycheck Mentality”
It will be disastrous to start investing hoping you’ll earn enough to replace your paycheck. Many have tried doing it by becoming day traders. It forces you to engage in short term plays – buying and selling stocks feverishly in an attempt to make small gains from short term price movements.
Unfortunately, getting in and out of the market more frequently comes at a stiff price – the outlandish fees you have to pay your brokers and the higher risk exposure. Besides, it is very rare for short term players to outperform the market. And if ever they do, they still end up underperforming once you deduct the aggregate brokers’ fees that pile up.
What you need is a long-term plan, particularly if your portfolio is meant to tidy you up during your golden years. As one successful investor once said “you must treat your investment decisions as if you only have 15 trades to make throughout the life span of each investment”.
Putting all your eggs in one basket by failing to diversify
Many investors tend to put all their money on stocks of companies belonging to the same industry. Such a move is quite risky because if anything adverse happens, the whole portfolio will go down with it.
The best thing to do is to thin out your risk exposure by broadly diversifying your holdings – spreading your money on different asset classes and not just on one. It is also important to strike a balance in your holdings such that you achieve maximum gains with the less risks.
Investing in stocks without doing due diligence on the company
Many investors invest in stocks because they simply like it or in a spur of the moment thought perhaps influenced by the stock’s most recent favorable price movements, without doing some due diligence work or without assessing the company’s financial standing and its profit potential in the long term.
Making a stock or a bond pick out of whims or without careful evaluation is a perfect formula for disaster.
You pay too much attention on media broadcasted financial advice
Stock or bond picks taken from financial news shows will not really help you achieve your goals. They are mostly done with hindsight. If you reflect on the wisdom of it, do you think anyone who has a profitable investment tip or a secret formula will announce it on live television?
For sure, they would rather keep it to themselves and make their millions than continue making a living blabbering in the boob tube or publishing financial newsletters with investing tips.
Buying high, selling low
People often try to jump in or out of a bandwagon too late. They observe the rise of rallying stocks with guarded caution and only make their decision to buy after it’s ready to peak. Or, they hold on to ‘losers’ too long in the hope that they will bounce back so they can at least break even only to dispose them at a bigger loss after realizing too late that the slide is bound to continue.
As a result, they either buy high or sell low, which is contrary to the main trading dictum which is to buy low and sell high.
Predicting short term market movements
Almost all investors try to time their entry into or exit from a trade by predicting short term market movements. They are more often than not – always wrong. The best way is to evaluate the long term potential of a security to make profits then buy and hold.
Going the way of the high-frequency traders
High frequency traders buy and sell securities more often than they change their underwear. No less than investing icon Warren Buffet warned us against this when he said you are making a big mistake if you are trading actively. He is a firm believer in buying and holding a security for the long haul.
You can avoid the common investing mistakes beginners make and put yourself in a better financial position. Know your financial objectives and get a handle on your investment options. Keep your cost of investing low and stay on top of your investments. Once you have cash reserves set aside for liquidity, you can start spending money one step ahead of the crowd.
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