Investing in the stock market is an exciting proposition for the first-time investor. But many new investors commit errors with devastating consequences they could have avoided if they had taken the time to better prepare themselves. Here are five of the most common mistakes beginning investors make and what to do about them.
Putting Investment Eggs in One Basket
Having too narrow a portfolio exposes you to financial risk if there’s ever another stock market collapse or if one or two investments fail. Investing in several different asset classes (e.g., stocks, bonds, money market instruments, commodities, index funds) reduces your risk and helps you better meet your investment goals. However, don’t go in the opposite direction and spread your assets too thinly. In this instance, you run the risk of achieving only a small return and failing to achieve your investment goals.
Failing to Create an Investment Plan
Many new investors fail to create a plan that will help them make their investment goals. You need to know where you’re going, otherwise you won’t know when you’ve achieved success. At a minimum, an investment plan should answer the following questions:
• Why are you investing and which investments will best meet goals?
• What risks come with the investments you want to make?
• How will you distribute funds to your portfolio’s asset classes to carry out your goals and address identified risks?
• How will you determine the success of your portfolio?
Answering these questions ensures that you start your investment career on a solid foundation.
Making Emotion-Laden Decisions
A common trap beginning investors, and even many seasoned ones, fall into is making decisions based on irrational fears and unrealistic expectations. Instead, investment decisions need to be based on hard research and factual analysis. This can easily be accomplished with the help of a financial news app that provides clear, credible thinking on the markets and investing.
Paying Too Much for Investment Services
Transaction fees, mutual fund expense ratios, and advisory service fees, can make a substantial dent in your investment profits. It’s important, therefore, to understand all the fees and expenses associated with the investments you want to purchase. Reducing fees and expenses as much as possible can save you hundreds of thousands of dollars over a life time of investing.
Trading Too Often
Are you a trader or an investor? When you invest in a company’s stock, you are in it for the long haul. Stock prices are going to rise and fall, but you don’t view this movement as your main reason for buying or selling a stock. Traders, however, buy stock with the expectation that the price will go up. When it does, they sell it and move on to the next big money-maker. If you have long-term goals, you need to be an investor and not a trader.
New investors will save themselves a lot of heartache by preparing a plan, boning up on investment basics, and fully researching individual investments before handing over their hard-earned dollars. It’s the only way to avoid costly mistakes.
I think making a plan, including setting goals, really helps when it comes to investing. If you want to get 20%+ returns you are going to have to take bigger risks than if you want more conservative returns.
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Putting all your eggs in one basket should be really be avoided by every investor out there. You can never achieve a perfect portfolio without diversifying it. The next mistake that I think will surely ruin an investor’s plan is the third one, having your emotions decide what you got to do next. Put your emotions aside and get yourself in a better situation before you decide.
Those really are common mistakes investors make today but they can be still avoided, right?
People get skittish really quickly when money is involved.
Great advice. I especially agree with the making a plan. Doing this will help you address all of the other issues.
It all starts with a plan!
Well put. Trading too often is definitely a common mistake and difficult to follow. Many bogle investors even recommend to readjust your portfolio only once or twice a year. Depends on the portfolio I guess.
Very thoughtful list! Perharps to add onto it:
It might help if the investors have a reasonable time frame to benefit from their investments, all too often people are in a hurry to trade their portfolios and end up losing out on the longer term benefits.
Secondly, keep of the financial media grapevine, do your research and make your own decisions based on your findings and be disciplined in sticking with that!
Failing to Create an Investment Plan I believe is the biggest blunder an investor could make. Every investment deserves planning. No matter how small or big it is..
Great list of things not to do. My worst are not having a plan and being too emotional when making decisions. Thanks for the reminder!
I think making a plan is important. Would you start a business without a business plan? No. So why invest without an investing plan?