3 Common Investing Mistakes To Avoid
June 1, 2018
There seems to be an unfair amount of negativity and criticism surrounding young investors with limited experience. Truth is, the biggest difference that separates beginner and intermediate investors is the mistakes they make. Not because seasoned investors don’t make mistakes, but rather, they’ve used their past experiences to learn and grow from the mistakes they’ve made when they were starting out.
If you’re an investor with less than 5 years of experience, you have a great opportunity to identify and learn from your (or others’) mistakes, so you can strive to make better investing decisions in the future. To help you out, we’ve put together three of the most common investment mistakes made by new investors, and what you can do to avoid them:
1. Not Starting As Soon As Possible
The greatest asset to any investor is time. Years lost in your twenties due to uncertainty about the stock market is a missed opportunity – these years are valuable to the overall timeline and production of our portfolios, thanks to the compounding nature of the market. Reviewing a hypothetical portfolio, you can see the difference between what someone who starts investing in their twenties versus the same investor who waits an additional ten years:
Via Vanguard.com This hypothetical illustration assumes an annual 6% return. The illustration doesn’t represent any particular investment, nor does it account for inflation.
The compounding effects on that first decade of earnings, dividends, share price increases and potential stock splits or buybacks can completely transform the value of a portfolio over the subsequent years. By the time that investor is eligible to retire, the value of their investments could be altered by hundreds of thousands or even millions of dollars, depending on the investment size.Time is our most valuable asset - Jim RohnCLICK TO TWEET
The solution is to start as soon as possible. If you’re not in a comfortable position to start investing yet, create a realistic financial plan for yourself to get started.
2. Not Diversifying Your Portfolio
Some investors become passionate about a particular stock or industry and decide to invest in that particular stock to an extreme. Though there are several reasons why this happens, often the biggest misstep is not taking the time to consider the risk associated with putting all your eggs into one basket.
Not diversifying your portfolio can be a troublesome strategy for several reasons. If you purchase one investment and that stock underperforms in the market, or even worse, fails to keep up with inflation and taxes, you lose ground at the time you can least afford it. If you’ve invested in multiple stocks of similar companies, a similar situation could arise because investments in the same industry are often positively correlated.
To protect your assets, all investments should be hedged with diversity of investment and set up to avoid the loss of value over the short term. A simple way to diversify is to gradually build positions in multiple investments through a process known as dollar cost averaging. Cost averaging is the process of buying stocks at multiple price points over time. If there is a downturn in the price, as long as it does not go below the lowest price you purchased, you are protected. Not only can this improve the health of your investments, it can also hedge your positions within individual stocks. Spreading this philosophy across multiple stocks can lead to a nearly impregnable collection of investments that can provide protection against significant losses, as you will find they are diversified twice.
3. Obsessing Over Daily Fluctuations
Investments produce wealth over time. This much is well understood by most people in the market. However, investors shouldn’t expect their shares to produce sustainable returns in the matter of hours or days. Building wealth takes time and patience.
Constantly checking the price of a stock, mutual fund or other investment is a recipe for increased expenses, lack of fiscal discipline, and overall chaos in your portfolio. It is likely to inspire emotional reactions, which usually lead to sales and “churn” in your investment accounts that can consume some of your gains.
Buy and hold has been the mantra of successful investors for the last century. Your purpose is to accumulate wealth, not to make transitory bets on the market lurching one way or the other.
The Future Is Investing
Today, millennials are more open to investing in the stock market, with 80% planning to take more risk and and 66% showing interest in equities, according to MarketWatch. That said, there are still many individuals interested in investing that don’t take the leap. The idea that investing is only for the rich and experienced was once and for all dispelled with worldwide accessibility to financial literacy resources, online trading options, and live stock news.
Bottom line, investing is for everyone. Whether you’re a wealthy business owner or a full-time student university student, there’s no faster way to build wealth than by following a disciplined investment strategy. The sooner you start investing, the better off you are planning for your financial future.
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