Now more than any other time in history, there is a plethora of mediums that allow retail investors easy and free access to the market. Because investing is now so easy, many overestimate their ability to be good investors. This results in beginner investors making mistakes and losing money in many cases that could have been avoided. Let’s discuss the 6 common investment mistakes to avoid.
Trying To Time The Market
When the news first broke that COVID was spreading throughout the US, the stock market took a nosedive. By the end of summer all three indexes were at historical highs and have been climbing ever since. No one predicted the markets would recover as quickly as they did. In fact, some analysts were comparing market conditions to the Great Depression of the 1930s. The point to this story is no one really knows which direction the market will swing from one period to the next. Most importantly, no one has ever consistently predicted market performance. Instead, the investment connoisseurs and world-renowned economists recommend that persons invest at consistent intervals. This is regardless of market performance. The expectation is that over the long term, your investment gains will offset your losses. Furthermore, it is proven that over the long term the stock market will perform at a gain. Just look at any of the three indexes over the past 3, 5 or even 10 years.
Not Understanding Your Investments
Over the years of studying finance and accounting, I learned that the most rookie mistake is investing in something you know nothing about. The best of investors will advocate for you to do some form of due diligence before making an investment. This includes understanding the company’s value proposition, the industry it operates in and its performance relative to its competitors. This is the most basic information that investors should know before they invest. If you want to go even further, find out what are the future predictions on the industry, what analysts are saying about the company, the management’s reputation and finally what are risks that could hinder the company from doing well. Advanced investors will perform statement analysis then use this information along with other qualitative measures to determine if they should invest in a company. The more information you have, the better your judgment will be in determining if a company is a good investment or not.
High Investment Turnover
Investment turnover is the rate at which the investors buy then sell their investment holdings. If an investor does this too frequently, they are more likely to lose their money or miss out on future gains. If the investor does make gains, these are lowered by excessive transaction fees and taxes. To gain the tax advantages of investing, the investor must hold their assets for at least a year. This is one of the 6 most common investment mistakes to avoid.
Not Diversifying
Diversifying your investments is one of the first things they teach you when you start to study finance. Essentially, to maximize your returns, your portfolio should have a mix of different asset types. A rule of thumb is to have the percentage of your holdings in bonds equal to your age. If you’re dverse to investing in bonds, then you should invest across industries and even across countries. This is recommended as different investment types perform differently in varying economic and even political environments. Therefore, if one or two markets are down, these losses will be offset by the other markets that are performing well.
Being Too Emotional
Being too emotional can lead to big losses when investing. When the market is down, people impulsively sell or buy assets. Both actions can be bad for the investor. Similarly, if the market is up, people may impulsively buy or sell assets. Relying on your emotions when investing can cause investors to buy overpriced assets, hold on to losing assets too long or sell winning assets too early. Your investing strategy should be based on judgment backed by information. This is a very common investment mistake to you need to avoid.
Not Having An Emergency Fund
The best of Wall Street professionals will tell you ‘Invest only what you are willing to lose’. All investments carry varying degrees of risks. The risk being that rather than a positive return on your investment, it loses value. Because of this, it’s always wise to have another source of funds in case of an emergency. This emergency fund is essential because you won’t have to risk cashing out your investment at a loss if an emergency arises. If you want to get started on building your emergency fund, check out this blog [Yes, You Need An Emergency Fund].
If you find yourself making any of the mistakes above, step back and evaluate your investing strategy. Over time your skills and judgment will sharpen, then you’ll be on your way to financial freedom.
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