Making investment mistakes is easy to do, but it’s also avoidable.
All you need to do is educate yourself on the most common blunders and steer clear of them.
Here are eleven of the most common investment mistakes to avoid:
Mistake #1: Not paying credit card debt before investing
Credit card debt is one of the worst kinds of debt because it often has high interest rates (about 15% or more). If you’re carrying a balance on your credit cards, it’s important to pay it off before you start investing.
Think about this- if we have $5,000 to invest and $5,000 in credit card debt on a card with an 18% annual interest rate, just to come out even, we would have to get an 18% return (after taxes). Since that is an extremely unlikely scenario, investing with credit card debt is like swimming with an anchor—it will drag down your returns. Pay off your debt first, then start investing.
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Mistake #2: Not investing early enough
The earlier you start investing, the better. Time is one of the most important factors in compounding returns. The sooner you start, the more time your money has to grow.
If you don’t start investing early, you may have to take on more risk to make up for lost time. This can lead to chasing returns and making impulsive decisions.
Mistake #3: Investing without a plan
Investing without a plan is like driving without a map—you may end up going in the wrong direction. Without a plan, it’s easy to get caught up in the market’s ups and downs, chasing returns, or following the latest hot tip.
Before you start investing, it’s important to set goals and develop a strategy for reaching them. Once you have a plan in place, stick to it. Review your progress periodically to make sure you’re on track.
If you’d like some guidance on creating an investing/trading plan, check out our post here.
Mistake #4: Relying on hot investment tips or following the crowd
When it comes to investing, it’s important to do your own research. Relying on hot tips or following the crowd can lead to impulsive decisions and chasing returns.
You’ve probably heard the saying, “There are lies, damned lies, and statistics.” The same can be said for investment advice. Just because someone says a stock is a sure thing doesn’t mean it is.
Do your own research before making any investment decisions. And be wary of anyone who claims to have inside information or a “hot tip.” If it sounds too good to be true, it probably is.
One of the best ways you can avoid this mistake is by passing any ‘hot stock tip’ you hear about through this 10-point test.
Mistake #5: Paying too much in fees
Investment fees can eat into your returns and add up over time. That’s why it’s important to be aware of the fees you’re paying and to look for ways to reduce them.
Many investment companies charge fees for managing your account or buying and selling investments (i.e. brokerage fees). These fees can vary widely, so it pays to shop around. There are also a number of fee-free or low-cost options available, such as index funds.
Mistake #6: Banking on collectibles and other “investments”
Some people think that collectibles and other so-called “investments” are a good way to save for retirement. But in reality, they’re often more trouble than they’re worth.
Collectibles can be difficult to store, insure, and sell. They may also be subject to taxes and fees. And because they’re not easy to liquidate, they’re not a good source of emergency funds.
While they may hold some nostalgic value, old comic books are not going to fund our retirement. Neither is hoping we win the lottery. The stock market is our best option for laying the path towards our future financial health.
The bottom line is that collectibles and other “investments” should only make up a small part of your overall portfolio. If you’re counting on them as your primary source of retirement income, you’re likely to be disappointed.
Mistake #7: Not staying invested for the long term
Investing is a marathon, not a sprint. It’s important to stay the course and not get sidetracked by short-term market fluctuations.
If you sell when the market is down, you lock in your losses. By staying invested, you give yourself a chance to recover when the market eventually rebounds.
Of course, there are times when it makes sense to sell an investment, such as if the company financials have changed or you need the money for an emergency. But in general, it’s best to stay invested for the long haul.
Mistake #8: Moving around too much
Adding to the previous point, trying to time the market or moving in and out of investments too frequently can lead to losses. Investing is a long-term game, and successful investors know that it pays to stay invested.
If you find yourself constantly buying and selling investments, it may be time to reconsider your strategy. Review your goals and make sure your actions are aligned with your long-term objectives.
Mistake #9: Always being 100% fully invested
While it’s important to stay invested for the long term, that doesn’t mean you should always be fully invested.
In fact, there are times when it’s prudent to have cash on hand. For example, if you think the market is about to crash, you may want to sell some of your investments and hold onto the cash – that way, you’re ready to buy back in when the market rebounds.
Holding cash is a legitimate strategy – you don’t always need to be 100% invested with your funds. If you need help with this, I suggest learning more about position sizing and market volatility.
➜ Related Post 2: When is Stock Market Volatility Good? When is it Bad?
Mistake #10: Not diversifying your portfolio
Diversification is key to mitigating risk in your investment portfolio. By investing in a variety of asset classes, you can offset losses in one area with gains in another.
Not diversifying your portfolio is one of the most common—and costly—mistakes investors make. It’s important to spread your investments across different stocks, asset classes, industries, and even geography to reduce your overall risk.
Having said this, there is a right way and a wrong way to diversify your stock portfolio, and unfortunately most rookie investors make this mistake.
➜ Related Post: Are you Diversifying or ‘Di-worse-ifying’ your Portfolio?
Mistake #11: Not monitoring your investments
As alluring as the idea of ‘passive income‘ is, investing is not a buy-and-forget proposition. You need to stay on top of your investments and monitor them regularly.
This doesn’t mean you have to check your investment portfolio every hour of every day. But you should review it at least once a week, or more often if there are significant changes in the market or your personal circumstances.
Monitoring your investments will help you make sure you’re on track to reach your goals. It will also help you identify and act on opportunities, as well as potential problems, quickly.
There you have it – 11 of the most common mistakes investors make, and how to avoid them.
Investing is not a get-rich-quick scheme – it’s a marathon, not a sprint. By avoiding these mistakes, you’ll be well on your way to achieving financial success.
Remember, slow and steady wins the race. Stay the course, diversify your portfolio, and monitor your investments regularly, and you’ll be on your way to a bright financial future.
Best of luck!