Now that we’ve taught you everything about the basics of investing, we think it’s important to show you what mistakes to look out for in the investing world. You can do many amazing things with investing, but there are also some common, avoidable mistakes. We’re here to tell you what to avoid so you can earn the most money possible.
1) Not Doing Enough Research
The first mistake new investors make is not doing enough research about investing. They’re confused with all the terms and lingo and don’t know the first place to start. This can lead to avoidable mistakes and money lost from poor decisions. A great place to start is our Beginner’s Guide to Investing article! In this article, you’ll learn all the investing terms you need to know, along with what types of investments you can make and how to get started!
2) Putting All Your Eggs in One Basket
Another mistake to avoid? Making all the same types of investments. You want to diversify your investments as much as possible. This simply means having different types of investments, such as real estate, stocks, bonds, or more. The more diversified your investments, the less risk involved. One of the main reasons to diversify your investments is because “it can actually improve your potential returns and stabilize your results.”1 By having multiple types of investments that all perform differently, “you reduce the overall risk of your portfolio so that no single investment can hurt you too much.”1
3) Chasing Past Performance
Something else that will hurt your investments is trying to duplicate results. Relying on past results to be today’s investment winnings is like expecting lightning to strike in the same place twice—thrilling, but highly unlikely. Investment markets are fluid and always changing, so don’t chase the past—keep up with market trends and keep your investments fresh!
4) Ignoring Fees
Did you know that to use some investment products, there are fees involved? We’re talking about things like brokerage fees, expense ratios, and trading fees. Basically, these are fees for using a broker’s services and to “cover the costs associated with administering investment products, operating your account, making transactions on your behalf or offering advice.”2 Brokers typically charge a percentage of your annual return, so the higher the percentage, the higher dollar amount that you will lose in fees. Make sure to watch your fees and choose your brokers wisely if you want to get the highest investment return possible!
5) Making Emotional Decisions
In the investing world, you don’t want your heart running your decisions—we’ll leave that to your brain. Emotional decisions have no place in investing—your decisions need to be logical and calculated to see the best results possible. Emotional decisions in investing often lead to buying high and selling low, hurting your overall investments and losing you money.
6) Timing the Market
Timing the market is basically trying to predict when the market will have highs and lows—but timing the market is impossible. There is no real way to predict when highs and lows will happen. Trying to time the market “is impossible and could be a costly mistake.”3
7) Forgetting About Taxes
Just like any other earnings, investments are taxable income. You always need to take taxes into account when investing, because taxes can significantly affect your net returns. For example, brokerage accounts charge you a certain percentage of tax after making a withdrawal—if the money is left in the account for over a year, taxes are considerably less (0%,15%, or 20%, depending on your tax bracket). If the money is taken out within a year, the income falls within your normal income tax bracket.4
You can even get tax-advantaged accounts, which are either tax-deferred or tax-exempt. These include accounts like traditional or Roth 401(k)s and IRAs, which you can withdraw money from after retirement with no tax penalty.4
8) Ignoring Inflation
Simply put, inflation is just a rise in prices. “The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.”5 You don’t want to ignore inflation when it comes to investing, because you don’t want to be putting your money into things that increase in value slower than prices are increasing.
9) Setting Unrealistic Expectations
Having unrealistic expectations about returns can lead to disappointment and risky investment decisions. Impulsive decisions and unnecessary risk-taking have no place in investing. Your decisions need to be thorough, calculated, and educated—you can’t be quickly buying and selling assets hoping for huge returns, where this can cost you more money in the long run by losing investments and paying more fees. Unrealistic expectations can also cause poor planning, which just intensifies the issues we’ve already discussed!
Keep Investing Smart
And there you have it, fellow investors! Armed with your newfound knowledge, you’re ready to take the investing world by storm. The world of investing is filled with opportunities as long as you tread wisely, keeping an eye out for those sneaky pitfalls. The treasure of smart investing awaits, and now, you’re more than ready to claim it. Keep learning, keep diversifying, and have fun on this thrilling ride of investing!
Resources
1https://www.bankrate.com/investing/diversification-is-important-in-investing/#diversification
4https://www.investopedia.com/articles/stocks/11/intro-tax-efficient-investing.asp