Most if not all new investors are eager to grow their money, all in a quest hoping one day they would become richer than rich. Guess what? Without a doubt anyone can get rich by investing!
Nevertheless, there are things you should WATCH OUT for in starting your investment. Investing carries out risks that can certainly make you lose your money. Consequently, let’s look at the top 8 investing mistakes that every beginner should avoid.
1. Investing Before You Are Ready
How exactly should you know if you are ready or not ready to invest?
There are two things that you should check.
First is to check your financial standpoint.
• Do you still have a lot of debts that you need to settle?
• Do you have an emergency fund that you can rely on if you were to run out of money?
Before you even think about investing, think about resolving your debts and also think about the money that you are going to set aside for yourself. When you are trying to invest you’ll never know what’s going to hit you so better secure yourself before you start to invest.
Next is to check if you understand the basics.
You would not want to go to a fight without even knowing how to fight. Start to understand asset allocation, what it means, the risks, and your options in selecting your investment.
If you are confident that you are able to address those two things then you are ready to start investing.
If you want to dig into investing even more, I’m creating a new course on this very topic. Click here to be added to the waitlist for the course. You’ll be the first to know when it is live and you’ll snag the lowest price!
2. Not Setting an Investing Budget
Beginners are always caught up with this mistake. When you are trying to invest, you always have to think about how much you have to set aside for investments and how much you are going to set aside for your other expenses.
Investing is committing yourself to the effort of growing your money. If you don’t set your investing budget then that also means that you don’t have clear objectives on how much money you would want to have. This is really dangerous since you would not be able to gauge yourself or understand if your investments are doing good enough or are they failing.
Having a line item in your budget is so important to grow your portfolio. Create a zero based budget and make a line item in your budget for your investments, X amount into your IRAs, X amount into EFTs, X amount into stocks.
3. Setting Unrealistic Expectations
You might be telling your friends that you’re trying to invest $1000 and that you expect it would grow into a billion dollars in a year. This kind of optimism is encouraged but you should know that there is no way you would be able to pull that off.
Investing money and making money takes time. You always have to look at the long run and take into account the interest compounding your investment.
Ever heard of that saying “If it is too good to be true, it probably is”? Then you might also think that a certain stock that is too good to be true can fulfill your expectations. But the truth is when you go in that line of thinking you’re probably gambling rather than investing.
4. Buying Into Investments You Don’t Understand
This is one of the most damaging mistakes an investor can make. The act alone of investing into stocks that represents businesses you don’t understand can bring out all the other mistakes that you should avoid.
The behavior of these stocks’ performance in the market would be completely foreign to you. If there are sudden changes on the stocks’ performance or deviation with its behavior, you would already freak out. This would lead to you doing unprecedented moves that can be completely unnecessary.
Behavior and performances really rely on how these businesses operate. So at least try to understand how these businesses work!
5. Confusing Past Performances with Future Expectations
When you seek out the past performances and historical returns of certain stocks within the market, you might think that you should invest in stocks that have huge returns. Occasionally that would work, but most of the time it won’t.
It is not just a tip but this is actually a law. Past performances are not the exact indicators of future performance and the Security of Exchange and Commissions require financial advisers to remind investors of that fact.
“Missing a train is only painful if you run after it”. -N.N. Taleb
There are a few points that an investor should consider to avoid running after that train. One of them is to understand why the specified companies under-perform or over-perform in the past years. Also think about the risks that go with a company’s growth or its worst case scenario. Focus on the future and design your portfolio on how the market would likely shift over time.
6. Putting All Your Eggs in One Basket
If you purchase one stock and it fails, that’s all you have. So it makes sense to purchase a wide variety of stocks so that you have more room for error if (and when) something goes ‘wrong.’ My advice is to have more than 15 different stocks so that you can diversify your portfolio and have a better chance at risk aversion.
This is why index funds and ETFs are a wonderful way to invest.
When you purchase index funds, you buy a group of stocks or bonds– or even both. That ‘variety pack’ purchase lowers your risk of picking “bad” investments. In other words, there is significant variety in index funds.
There are international index funds, tech index funds and even “small and medium cap,” index funds that hold smaller and medium sized companies.
The sky’s the limit, which means your risk is limited.
7. Buying what other people are buying
It is a common mistake to copy other people’s strategy.
I know what you are thinking! It is easier to copy someone’s work and incorporate it into your own.
Having thoughts like “if they could do that then I could also do it” won’t help you.
However! There is a trick to that misconception. Yes it is easier for a person to copy someone’s work but it is much better to understand why they are doing it. To keep this short never ever blindly follow what other people are doing but instead try to understand why they are doing it.
8. Investing out of Emotion, Don’t Sell or Buy on Fear!
Risks and uncertainty within the market can make you anxious. This brings out different emotions in you such as fear, anxiety, excitement, greed, and to some pride.
Stock markets can be uncertain and might deviate beyond your wildest expectations. Experts call this the investor’s emotional roller coaster. But this doesn’t mean that you should let your emotions take over you.
Think objectively and always remember that these were the risks that you were willing to take when you started your investment.
Never let your emotions get ahead of you!
When the stock market is going really low, this puts you to the test of whether you immediately sell out your stocks out of fear or if you would keep your composure and understand why this is happening.
When the stock market is going really high, your emotions would be completely filled with excitement at the point of euphoria. This would most probably lead you to think that it is the best time to buy more stock, not knowing that at this point what you really are trying to buy is more risk.
Always try to understand and strategize the moves that you are going to make. Regardless of the environment that you’re in, always remember that you have to be rational and keep your head in the game.
Summing it all up, you can always avoid committing these mistakes. Be patient, be rational, and never stop learning. It is your choice if you want to avoid these mistakes, but always remember that making money is more fun than losing it.