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When trying out something new for the first time, be it learning how to drive, nursing heirloom tomatoes, or making yogurt at home, you’re bound to make one or two errors. In all new ventures, learning is an essential part of the entire process however painful and tough it may be.
Investing is one of those ventures that requires proper guidance and advice to avoid some costly mistakes.
If you’re new to the realm of investing, you’re probably wondering why you’re not financially independent despite having what it takes to reach your financial goals.
The following are some of the most common investment mistakes and how you can steer clear from their harmful financial effects:
1. Carrying Out Little to No Research on Your Investment Options
Most people venture into investing without having a complete understanding of what they’re actually investing their money on.
What this spells out is that they’re not really interested in knowing what to expect in regards to profits or losses.
Just because an investment opportunity looks really good and seems like it has the potential to soar to greater heights, take a step back first. How much do you know about the market, company or product? How poised is it to grow exponentially?
If you decide to invest in it simply because it’s your most preferred brand and you wish to express your brand loyalty, it might cost you dearly in the long run. Warren Buffet encourages the ‘buy what you know’ strategy especially for those who are just starting out.
As sound as the advice may be, you may also want to do your homework prior to making any purchases. Have an in-depth analysis of your desired company’s business development, economic outlook, and the consistency of its cash flow.
Be wise in all your investment endeavors and gauge a particular company’s value based on its revenues, profit margins and monthly/annual earnings.
Proper research is founded on technical analysis, which is basically looking for variants in data when determining trends.
Making use of both techniques and keeping abreast with the world’s general economic and market conditions is really important.
On the other hand, if you simply don’t have the time and the effort to research all you need to know about a certain company, seek out the services of a skilled advisor.
2. Being Unmindful of the Costs Involved
Before you think of investing, take time to be aware of the fees in relation to your investment. Your advisor (if you’re thinking of getting one), should be capable of clearly explaining the different types of investment fees you’re expected to pay.
If you don’t have an advisor by your side, you’ll have to find out which fees you need to pay on your own by going through the financial and prospectus institution documents and websites. Whether you have an advisor or not, you’ll still be required to pay fees.
When you’re inquiring about investment fees, get more details when someone says “My company compensates me.”
You’re entitled to know what you’re expected to pay and how someone is paid for suggesting an investment to you.
The following are the six common investment fees every newbie investor should be aware of:
- Internal Expenses or Expense Ratio
- Investment Advisory Fees or Investment Management Fees
- Front-End Load
- Transaction Fee
- Custodian Fee or Annual Account
- Surrender Charge or Back-End Load
The fewer investment fees you pay, the more you may have to re-invest. Therefore, it’s highly necessary that you know what you’re getting yourself into cost-wise.
Additionally, you also need to understand how and when the fees will be calculated, quoted, and ultimately applied.
Yes, it may be somewhat of a hectic process, but there’s no need to be put off by it. Check out helpful micro-investing apps such as Stash that save you the hustle involved in coming up with the total costs involved in investing.
Among the most important things men and women alike can do to ensure their financial security it to start investing as early as now. You may think that you have all the time in the world but in reality, time flies fast and at a very alarming rate.
A major investing deterrent among newbie investors is the fact that you need to put in ‘a lot of money’ for a start.
This is a common investment myth that has been around for quite a while. You don’t need to be rich to start your investment journey. In fact, for as little as $10.00 every week, you’re set to enjoy a successful investment in future.
A few recurrent but straightforward mistakes are hindering you from living up to your financial potential.
It’s understandable that there’s simply so much to wrap your head around. Don’t be overwhelmed by the vastness and complexity of investing. Quit stalling and get yourself knee-deep with stock investments.
With that said, don’t let other peoples’ mistakes deter you from taking the plunge. Ultimately, investing can be a powerful yet essential means to build your wealth and grow your money.
Are you ready to start investing but you’re not sure of where to begin? Your company’s 401(k) and other retirement plans may be an excellent place to start. Alternatively, you can open an IRA account and deposit as little as 50 bucks per month.
If you’re hopping from one job to another, it’s essential that you consult your new employer about retirement investments and what it takes to roll over funds from an old account. Whatever you feel you must do, do it now. Baby steps first, then grow as you learn.
4. Giving an Ear to Wrong Advice
Important investment decisions have to be made and of course, not all decisions will work out in your favor. You’re bound to make mistakes here and there.
To avoid going down the wrong path, seek counsel from a skilled financial adviser. He/she can also be your mentor and coach. Having a good financial adviser by your side has its fair share of perks. They can help you a great deal in
- pointing out your problem areas
- Making money with your investments
- coming up with strategies to help you achieve your financial goals
- Setting your priorities straight
- Making rational investment decisions
- Doing all the ‘dirty work’ including researching different investments costs and options
The success of your investment venture solely rests upon your adviser’s knowledge, experience, and background.
As professional and skilled as they may come across to be, they’re human too – you can’t expect them to be right most of the time.
That being said, any mistake you make based on wise counsel and sound judgment is one thing; making one based on wrong advice is another. Poor investment advice comes about as a result of two instances: first, your advisor places their self-interest ahead of yours in most cases.
Second, your advisor lacks the required knowledge to perform due diligence prior to taking action and making recommendations.
By now, you should be aware of the fact that every wrong counsel you receive in relation to investment has its short-term consequences. Eventually, it results in the loss of your hard-earned money.
When evaluating your advisor or finding one for that matter, always be alert for obvious cues that suggest they’re not working in your best interest.
If you’re not enjoying any noticeable results from their investment advice, don’t hesitate to spend your money elsewhere. It’s all worth it in the end.
5. Allowing Emotions to Cloud Investment Decisions
‘Emotional investing’, as it’s popularly known, has some really detrimental effects to your investment journey. It’s no secret that your emotions get in the way of the investment decisions we make.
Money often triggers feelings of nervousness, greed and the most common of them all, fear. Newbie investors become engulfed in a swirl of emotions that they give in to the temptation of moving their investments around.
Navigating through the investment market’s ever-changing tides can prove to be quite a daunting task especially for individual investors.
There’s no point in feeling depressed over investments that certainly don’t care about you. Most investors make some unwise financial decisions once they let their emotions get involved.
That’s why it’s imperatively necessary that you put down specific rules and systems in place before getting serious about investing.
To be fair, there’s no critical decision we make in our lives without involving our emotions. There’s no approach that’s entirely perfect, but putting your feelings aside when making financial decisions can really work out for you.
The best way to go about this is by avoiding selling an underperforming investment impulsively. As much as possible, try to stay on course with an expanded portfolio that can withstand the market’s inevitable short-term ups and downs.
6. No Financial Goals for the Long-Term
Take time to establish your long-term financial goals before venturing into investment. Though it’s not advisable, buying and selling stocks with a short-term mindset is possible if there’s still a long-term strategy in place.
When coming up with a long-term financial goal, think about why you’re investing in the first place. Most of us don’t want to work until we die.
At some point in our lives, we wish to get out of the race peacefully and pursue our life’s desires. This may not be everyone’s goal in particular, that’s why it’s crucial that you figure out that one thing that matters to you and is worth investing in.
Do you wish to share a roof with your soul mate in a tiny beach home? Maybe you want to be mobile and spend the rest of your life living out of an Airstream trailer.
Decide on the direction you wish to take in future to enable you to plan for it accordingly. In most cases, living on the beach is costlier compared to building a small home on a portion of land in Wyoming.
Once you’ve set your mind to what you want to achieve later on in life, you can use that as motivation to invest even more. Write down your goals and try to adjust and adapt your personal investment philosophy.
You wouldn’t want to look back at your investment in the near future and think about how ridiculous your current investment is. Though investing is an emotional game, don’t allow your emotions to get the best of every decision you make financially.
7. Investing without a Diversified Portfolio
For any wise investor, being thoroughly diversified is a necessity. Having a diversified and balanced portfolio in more than one area can unintentionally prevent you from making investment decisions that you may later on come to regret.
Most of us start investing with a portfolio that’s either slightly or not diversified at all. We get into the investment game as overconfident investors who keeps a single major stock or fund in our portfolio, bearing in mind that we have all we need.
The more you continue investing, the more you realize that the slightest shift in the marketplaces you in a somewhat precarious position.
The moment you experience this, you will swiftly switch your investment allocation in a bid to reflect what you consider to be a diversified portfolio.
When you do this, rarely will you put into consideration things like market timing, the cost of the funds you purchase, whether or not the stock you buy has a dividend and a whole load of other important stuff. You may consider value investing at this point.
In short, you don’t want to start investing without diversified portfolio, complete with mutual and index funds. This will cut short your desire to tweak your portfolio now and then.
Adjusting your portfolio isn’t a bad thing, but it needs to be done very strategically. Failure to this can lead to a massive financial loss and vast amounts of anxiety and frustration about investing.
Therefore, pick out a diversification strategy that you’re a hundred percent comfortable with and work with it.
When you strike a balance in your confidence level, that’s a clear indication that you have a balance in your confidence level.
8. Getting into Investment with a Losing Mindset
When two teams are battling it out on the field, you’ll notice that one is more aggressive than the other. The laid back squad is thought to be playing to lose rather than to win. In the real sense, the less aggressive team is simply playing it safe.
More often than not, this strategy works as long as they keep trying not to lose and center their focus toward winning. Your investment strategy should have a similar concept.
When you start investing in a trying-not-to-lose strategy, you’re basically bracing yourself to lose – which is not a good thing.
Every investment needs an investor who’s in it to win it. Rather than being overly safe, you should be aggressive and proactive.
When you’re constantly fearful of losing, you may never take risks with your investments. Not taking any risks means you’re not ready for growth.
With every investment, you must have a willingness to test the waters for growth (both personal and financial) to take place.
The difference, therefore, lies in the level of your risk tolerance. You don’t have to buy up the riskiest investments to prove you’re ready to take on any risk.
Keep doing your research, know all there is to know about investing, but never shy away from any downside risk that comes your way.
Trying to prevent losses from from your portfolio is like trying to stop the rain from falling. It’s absolutely okay for any investment to completely strike out. Even the most skilled investors have gone through this at some point in their lives.
On the bright side, for every 10% loss on one stock, there’s always a 15% gain on another. Don’t be among the few who miss out on major market upswings because you’re too afraid of losing your investment.
9. Following the Masses
When investing, it’s best if you stick to your own devices. Just because most investors are experiencing their share of success by following a particular strategy, it doesn’t mean that you’ll experience the same level of success if you do it the same way.
It’s not a bad thing to take a tip or two from what your peers are doing, but it gets worse when you rely on their every move for the survival of your investment.
Don’t follow what your friends or family is doing because you love them and you wouldn’t want to disappoint them. Curve your own path. In most cases, it’s not really about the decision, but the timing of the decision.
When you notice the stock going on a downward spiral a few months before, you should be the first to know why.
The best way to stand out from the crowd would be to sell high and buy low. Here’s where research comes into play once more.
Look up different strategies that are currently being used by most investors and determine whether now may be the right time to buy, at a time when everyone else is selling.
Trust your skills (and your research) to always be ahead of the rest, rather than being at par with your fellow investors.
By doing so, in a matter of years or even months, you’ll be up 50% on the stock. By that time, you can decide to either take your stock and move on or better, hold the profits for the long-term.
10. Using the wrong Investment Apps
You may not consider this as a common investment mistake, but most people rely on apps for everything these days – investing being one of them. New investors use different investment apps to wrap their head around the stock market.
Professional investors may also find opportunities to improve their portfolios and save money with legitimate investing apps.
The thing about investment apps is that they make investing slightly simpler. Using the wrong ones makes investing, especially for a new investor, very hard.
Whether you intend on buying your first stock or your hundredth, the apps you make use of should be worth looking into. The following are some of the best apps you can make use of to ensure a successful investment:
- Robinhood. If you’re into free stock trades and you’re also for the idea of empowering those around you to start investing, this app can work out great for you.
- Clink. Depending on how aggressive you wish to be with your investments, Clink can invest your funds into an Exchange-Traded Fund portfolio. It’s basically good for micro-investing.
- Stash. This app assists you in making suitable investment decisions for yourself. It also provides a low-cost strategy to establish a diverse portfolio.
- Acorns. Investors who would wish to contribute to their investment every once in a while but think less about it, Acorn can automatically invest your funds in an ETF-managed portfolio.
- Vault. For all the retired investors out there, Vault is your ideal app. It allows you to open an IRA, SEP IRA or ROTH IRA account for every investment they’ve ever established.
If you’ve read the entire post up until this point, you now have more than one reason to rethink your investment strategy. If you’ve made any of these mistakes, don’t beat yourself up about it.
The biggest mistake you can ever make is repeating them over and over. Now that you know where you went wrong, learn as much as possible from your losses and move on. Also, don’t make a major mistake that most investors make – mistaking investments for savings.
Savings, to begin with, involve depositing a certain amount of money in a savings account, checking account or money market account.
The money you deposit may not make you instantly rich, but it’s a sure backup in times of financial uncertainty.
Investing is depositing a certain amount of money in mutual funds, bonds, stocks, etc. Compared to savings, investing has a ton of risks.
However, with proper investment decisions, the returns you yield after a few years will be relatively higher than your savings.
With that said, don’t be afraid of making mistakes. The valuable lessons you learn from them can catapult you to greater financial heights.