Investing is a great way to make a return on your money and grow your wealth over time. There are a multitude of investments from traditional stocks and bonds to alternative assets like cryptocurrency and real estate. Wherever you decide to invest your money there are some important things to know first. In this post we will look at what to know before investing in stocks, and the 14 biggest investing mistakes to avoid that will allow you to become a better investor.
14 Investing Mistakes To Avoid
The below is a list of what not to do when investing, ensure you avoid these biggest investing mistakes.
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Not Understanding The Investment
First up on the list of investing mistakes is simply not understanding the investment in the first place. This includes not understanding the business model or market in which a company operates. Or could even include an entire asset class. For instance, cryptocurrency is a relative new investment class and many people do not understand the technology behind it or how it works. Often seeing hype and jumping in when the price rises for fear of missing out (FOMO).
Before investing money into anything it is crucial you know exactly what it is, how it works and it’s future outlook.
Fear of missing out, or FOMO for short could be one of the biggest ways to derail your success. Investing just because something is increasing in value and seeing others making large profits leads to bubbles. Where prices are driven up to unsustainable high levels before crashing dramatically.
FOMO investing is often fueled by social media, with people hyping up hot stocks or flashing their latest gains for all to see. People who see this naturally don’t want to miss out on those big gains – after all the main point of investing is that we want to grow our money. It’s not always nice to see that stock you didn’t invest in has suddenly increased 10 times in value.
But just because something keeps increasing in value or you see other people making money from it doesn’t always mean it’s a suitable investment. This one of the biggest investing mistakes that new or inexperienced investors make.
Buying Just Because Something Has Fallen
A falling knife is when an asset experiences a sudden drop in price. In investing there is an expression of ‘don’t try to catch a falling knife’. Which basically means to wait until the price has bottomed out before buying.
There are many reasons assets such as stocks may see a sudden drop in price including poor earnings reports, legal issues, negative publicity, problems in the wider market and much more. Sometimes these are just temporary issues and the price may quickly rebound. Other times the price may continue in decline for considerable time. Or even never recover at all, which is usually indicative of more serious problems.
For instance, say a company publishes it’s annual results which are well below market expectations and the stock price plummets 50% in a day. It’s all too easy to see this huge drop and buy in the expectation of a rebound.
But what are the reasons behind people dumping the stock, is this drop justified? Perhaps the company has unsustainable levels of debt and could soon be in liquidation. Or maybe it’s sales are rapidly declining or it operates in a dying industry. Falling knives can present opportunities, but you must first stop, think and do your research.
It is possible to make money on sharp price drops through either short selling or buying at the right time. But this is only really suited to experienced traders as it involves technical analysis and good timing. Which brings us onto our next point…
Trying To Time The Market
Markets fluctuate up and down on a daily basis and trying to time the market for the best time to buy or sell is an extremely difficult thing to do. It is so difficult to predict which way something will go that even the professionals don’t always get it right.
There are lots of things that can move prices in the short term such as inflation, politics and negative sentiments. Over time this volatility can be smoothed out which is why it is advisable to invest for the long term. There is a saying that investors should adhere to ‘time in the market not timing the market’. This is one of the commonplace investing mistakes people often make.
Not Having Clear Goals
Not having clear investment goals can lead to poor performance. When looking to invest it is important to first have a clear goal of what you are investing for such as saving for retirement, your first home or an important life event etc. This should also give you a clear time frame that you will be investing over.
Having this information will enable you to devise a strategy, plan out asset allocation and determine your attitude to risk. Without setting clear goals investors can lose focus and be drawn to more short term thinking rather than keeping focused on the long term goal.
There are different types of investment accounts available that are suited to the varying needs of investors such as IRAs that help individuals to invest tax efficiently for retirement.
Having A Short Term Approach
The next of the common investing mistakes is having a short term approach to investing. This point correlates with the previous mistakes of not having clear goals and trying to time the market. It can lead to frequent trading and increased costs.
You can also invest for the long term using tax advantaged retirement accounts including self directed IRAs.
Trading Too Frequently
Trading too frequently usually means an investor is taking a short term approach, likely trying to capitalise off of short term price movements. Long term returns can be harmed by trading too frequently.
Many investors make the mistake of trading on the news, rushing to sell as soon as prices drop. This often leads to missing out on rebounding prices and jumping back in again when prices are rising.
Costs of these frequent transactions can soon start to add up and erode your returns.
Not Knowing When To Sell
There are those that will sell at the first sign of a fall. On the other side there are people that will hold onto an investment in the hope it recovers. The issue with this is that the price may take longer than you expect to recover or may continue in permanent decline.
Sometimes it can be better to cut your losses and move on to the next opportunity. By doing so you stand the chance of recouping money from a better growing opportunity. Rather than run the risk of leaving it in a perpetually declining investment.
Failing To Diversify
Diversification helps to spread risk across your portfolio so that it is not too concentrated in one particular area. By investing everything into a narrow field – whether it be a single stock or one geographic region your fortunes are dependent on that investment to perform well.
Diversifying your portfolio into different sectors, regions or asset classes can help to keep it more balanced and reduce overexposure to one area. This way, if one part of your portfolio under-performs you have other areas to help balance it out, preventing large losses.
It is a good idea to diversify your portfolio by holding a mix of different assets. This could be made up of a large percentage of traditional assets such as stocks and bonds. And then diversified further with alternative assets including real estate, cryptocurrency, peer-to-peer loans and more. Holding small amounts of cash in high yield savings accounts can further balance your portfolio.
We’ve stated the importance of diversifying your portfolio. But going too far the other way and over-diversifying can be just as bad.
Diversification does not mean you should buy everything, just broaden your exposure. Too much diversification can lead to under-performance and limited upside. As those better performing areas will have less resources allocated and be dragged down by too many poorer performing areas.
Some people may seek to diversify their stock portfolio by owning hundreds of different stocks which can limit upside potential from a few big winners. And whilst diversification is used to help reduce risk, there comes a point where adding more to your portfolio offers no further benefit and may only stifle growth.
Hot Investment Tips
Whether from self-styled investing ‘experts’ on social media or from professionals in the news, there are lots of people that like to tell you the best place to invest your money. You are best placed to avoid listening to these, they are probably just advertising their own services and get rich quick schemes.
It is easy for anybody to tout something as a good investment based on past performance but it doesn’t mean you should jump in and invest just because somebody in the industry told you it will rise.
Learn how to identify and protect yourself against financial scams.
Not Paying Attention To Costs
Investing often has several different costs attached. These could include transaction fees, account management fees and taxes. These need to be taken into consideration when choosing an investment account provider, these costs can really start to reduce returns over time.
Choosing not only the right provider but also the right account type can have great financial advantages. There are different types of accounts that can allow investors to grow money tax free or help lower their tax obligations. Examples of this are IRAs in the US and ISAs in the UK.
There are some great social trading and investing apps like Public. These apps offer plenty of commission free share trading plus access to other assets like cryptocurrency.
Investing Money You Can’t Afford To Lose
Successful investing requires a long term approach. You should never invest money that you will require in the short term. Instead you should ensure you have a financial buffer by building up an emergency fund.
It is also possible to trade ‘on margin’ using assets in your account as collateral to borrow money. This then allows the investor more money than they would have to invest. This can work both ways in that it can help magnify both gains and losses.
Not Learning From Your Investing Mistakes
One of the worst investing mistakes you can make is from not actually learning from your previous investing mistakes. Everybody will make mistakes at some point with their investment. We all have done – even the professionals like Warren Buffett.
Investing Mistakes Conclusion
Investing is one of the best ways to make money and grow your wealth over time. But there are many investing mistakes people often make that derails their success.
Some of the most common investing mistakes include thinking too short term, trying to time the market and not understanding the investment. Use the list of 14 investing mistakes above to ensure you don’t jeopardize your future financial success.
Ensure you use the right investment account for your needs. Apps like Public are good options for those that like to be more active whilst keeping costs low.
Then there are other more specialist platforms for investing in alternative assets such as whisky, gold, real estate and cryptocurrency. These are a great way to diversify your portfolio across a range of different assets types.
We hope you’ve found this list of investing mistakes to avoid useful, view our blog for more articles like this.
If you are new to investing, you should check out the answers to these common investing questions and misconceptions.
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