Common Mistakes of New Investors and How a Financial Advisor Can Help
Investing is not always easy, and earnings cannot be guaranteed. There are innumerable investment books, and everyone has their own set of strategies and tactics that work for them. Even after years of experience, expert investors do not always get it right. Furthermore, each investor is unique, with varying investment objectives, risk tolerances, and knowledge. However, there are several frequent blunders that all investors should avoid, as discussed below.
Key Takeaways
Mistakes in investing are prevalent, but some can be easily avoided if you recognize them.
The biggest blunders include neglecting to develop a long-term strategy, allowing emotion and fear to affect your decisions, and failing to diversify your portfolio. Other pitfalls include becoming obsessed with a stock for the wrong reasons and attempting to time the market.
1. Not Understanding the Investment
Warren Buffett, one of the world’s most successful investors, advises against investing in companies with business strategies that you don’t understand. The easiest approach to avoid this is to diversify your portfolio with exchange-traded funds (ETFs) or mutual funds. If you decide to invest in individual stocks, be sure you fully grasp each company they represent.
2. Falling in Love with a Company
Too frequently, when we see a firm we’ve invested in succeed, we fall in love with it and lose sight of the fact that we bought the shares as an investment. Remember that you acquired this stock to make money. If any of the fundamentals that motivated you to invest in the company change, you should consider selling the stock.
3. Lack of Patience
Slow and steady portfolio growth will result in higher long-term returns. Expecting a portfolio to do anything other than what it was intended to accomplish is a recipe for catastrophe. This means you must maintain reasonable expectations about the timing for portfolio growth and returns.
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4. Too Much Investment Turnover
Another factor that reduces return is turnover, or changing employment frequently. Unless you’re an institutional investor with low commission rates, transaction expenses can be exorbitant—not to mention short-term tax rates and the opportunity cost of missing out on long-term returns from otherwise wise investments.
5. Trying to Time the Market
Attempting to time the market also reduces rewards. It is incredibly tough to successfully time the market. Even institutional investors frequently fail to achieve success. A well-known study, “Determinants of Portfolio Performance” (Financial Analysts Journal, 1986), undertaken by Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, examined American pension fund returns.
This study found that investment policy decisions accounted for roughly 94% of the change in returns across time. In layman’s words, this suggests that asset allocation decisions, rather than timing or security selection, account for the majority of a portfolio’s return.
6. Waiting to Get Even
Getting even is merely another strategy to ensure you lose any profits you may have made. It suggests you’re waiting to sell a loser until it returns to its original cost basis. Behavioral finance refers to this as a “cognitive error.” By neglecting to recognize a loss, investors lose in two ways. First, they avoid selling a loser, which could continue to decline until it is worthless. Second, consider the potential cost of making better use of those investment dollars.
7. Failure to Diversify
Professional investors may be able to produce alpha (or excess return over a benchmark) by investing in a few concentrated positions, but average investors should avoid doing so. It is better to adhere to the notion of diversification. When creating an exchange-traded fund (ETF) or mutual fund portfolio, it is critical to include exposure to all key sectors. Build an individual stock portfolio that includes all key industries. As a general rule, don’t put more than 5% to 10% of your money into any single investment.
8. Let Your Emotions Rule
Emotion may be the single most important factor limiting investment returns. The adage that fear and greed dominate the market is correct. Investors should not allow fear or greed to drive their judgments. Instead, they should consider the wider picture.
Stock market returns may vary dramatically over a shorter time period, but in the long run, historical returns tend to favor patient investors.
An investor driven by emotion may observe this type of negative return and panic sell, when they would have been better off holding the stock for the long run. Patient investors may benefit from other investors’ impulsive judgments.
How to Avoid These Mistakes?
Here are some other methods to prevent these typical blunders and keep your portfolio on track.
Create a Plan of Action
Determine where you are in the investing life cycle, what your goals are, and how much you will need to invest to achieve them. If you do not feel qualified to accomplish this, contact a trustworthy financial advisor.
Also, remember why you’re investing your money; you’ll be driven to save more and may find it easier to select the best allocation for your portfolio. Adjust your expectations to reflect previous market returns. Don’t expect your portfolio to make you wealthy overnight. A steady, long-term investment plan over time will result in wealth accumulation.
Set Your Plan on Automatic
As your income increases, you may wish to add more. Keep track of your investments. At the conclusion of each year, evaluate your investments’ performance. Determine whether your equity-to-fixed-income ratio should remain constant or fluctuate depending on your life stage.
Allocate Some “Fun” Money
We’re all tempted to spend money from time to time. It’s the nature of the human experience. So, rather than fighting it, embrace it. Set aside “fun investment money.” This sum should not exceed 5% of your whole investing portfolio, and it should be money you can afford to lose.
Do not use retirement funds. Always make investments with a respected financial firm. Because this method is similar to gambling, you should follow the same regulations.
Limit your losses to the main amount (for example, do not sell calls on equities you do not own). Be prepared to lose all of your investment. Select and adhere to a predetermined limit to determine when you will walk away.
What Are Some Common Investment Mistakes?
Common investing mistakes include not conducting enough research, reacting emotionally, not diversifying your portfolio, lacking investment goals, not understanding your risk tolerance, focusing solely on short-term gains, and failing to consider fees.
How Can I Invest Money as a Beginner?
New investors should consider certificates of deposit, money market funds, high-yield savings accounts, Treasury bonds, index funds, and 401(k) retirement plans. These are all relatively low-risk investments that should provide some returns for the investor while also allowing them to learn the principles of investing.
Can You Invest $100?
Yes, you can invest $100. You can invest any quantity of money; it all depends on the asset. You can invest $100 in both a certificate of deposit and any stock priced at $100 or less.
The Bottom Line
Making mistakes is a normal aspect of the investment process. Understanding what they are, when you commit them, and how to avoid them will help you succeed as an investor. To avoid making the mistakes listed above, create a thoughtful, systematic plan and stick to it. If you must take a risk, set aside some fun money that you are completely willing to lose. Follow these recommendations, and you’ll be well on your way to creating a portfolio that will yield many joyful returns in the long run.
