Seven Common Investing Mistakes and How to Avoid Them
With advances in technology over recent years, investing has never been more accessible than it is today. Because of this, during the pandemic, with little else to occupy themselves, a flood of new investors entered the market, looking to try their hand at a new, potentially profitable, activity.
As with anything in life, investing mistakes are inevitable for beginners and learning from these mistakes are an important part of becoming a successful investor. However, as a beginner investor, there are a number of common investing mistakes which it is best to be aware of so that you can try to avoid them altogether. That´s why - in this article, for all you beginner investors out there - we have identified and explained seven of these common investing mistakes for you to watch out for.
Common Investing Mistakes
No Plan and No Investing Goals
The first investing mistake on our list is a mistake which many beginner investors commit before they even make their first investment.
As we mentioned at the beginning of the article, these days, investing is accessible to pretty much anyone with a computer and an internet connection. This can be looked at in both a positive and a negative way.
It is no doubt a good thing that investing is no longer confined as an activity for the privileged few. However, due to the ease with which the financial markets can be accessed, it is not uncommon for amateur investors to dive straight in, with no clear plan of action and without having set themselves any investment goals. This is a big and also a very common investing mistake.
Not having established both of these points prior to investing will hamper your chances of success. What are you trying to achieve from investing? Presumably you want to make money, but why? What in particular do you want to make money for? Can you leave your money invested for some time or will you need it back soon?
Knowing the answers to these types of questions will help you decide which investments will be most appropriate for your purposes. Once you have established this you can create an investment plan to stick to.
Investing Money Which You Need
Investing is all about creating wealth over the long-term. You are not going to get rich overnight. With that in mind, you should never invest any money which you are going to need in the near future.
Firstly, and most importantly, the capital which you invest is at risk and, therefore, you should not risk money which you need in order to survive. In fact, before investing, you should set aside a certain amount of cash as a buffer in order to make sure you can sustain yourself over the short-term, should anything unforeseen happen.
Secondly, you are much less likely to realise your investment goals if you keep drawing money out of your investments and not allowing them the time they need to compound and grow. A good rule of thumb here is to only invest money which you can afford to do without for at least five years.
Investing in Something You Don´t Understand
This may sound a bit obvious, but you should never invest in something which you do not understand. Even though this sounds like common sense, it is an investing mistake which many are guilty of committing.
How can you expect to generate returns from something if you don´t understand how it works? The simple answer is that you can´t. If you don’t understand how a business, or other type of investment, makes money, don’t invest in it.
Following the Crowd
Somewhat a continuation of the previous investing mistake, but it is worth highlighting this separately as, with the growth in popularity of social media and online forums, it is one of the most common investing mistakes made by beginners.
Just because everybody else seems to be investing in something, it does not necessarily mean it is a good idea. You should never make an investment without conducting your own research and evaluating the potential risk and reward.
In fact, we would even go as far to say that, when many people are flooding into a particular investment at the same time, you should approach it with even more caution than usual.
Constantly Checking the Markets
As we said earlier, investing is about generating returns over an extended period of time and, therefore, requires patience. You should not let yourself become obsessed with day-to-day movements in price and, the best way to do that, is to avoid constantly looking at the markets.
It is natural to be curious about how your investments are getting on and there is no reason why you should not check in from time to time. However, if you are constantly looking, sooner or later, you may be tempted into making a rash decision based on short-term market movements.
Remember, volatility in the financial markets is normal. Some days your investment will be up, other days it will be down, but the important factor to consider is how it performs over the long-term.
Another of the most common investing mistakes is not diversifying an investment portfolio. Like the saying goes “Don’t put all your eggs in one basket” and it’s the same when it comes to investing.
For example, if you only invest in one industry and then this industry crashes, your entire portfolio will be negatively affected. Therefore, it is important to spread your investments over different industries and different instruments so that any losses in one area can hopefully be compensated for in another.
Again, this might sound like common sense, but many investors fail to do so. Portfolio diversification is one of the most effective ways of managing your investment risk.
Starting Too Late!
The last entry on our list of investing mistakes is one which most people around the world have committed: starting too late; or not even starting at all!
You shouldn’t fall into the trap of thinking that you have to be a certain age or from a certain background to start investing for your future. As we mentioned several times already, investing is very accessible these days and there is a wealth of educational sources designed specifically to help beginner investors get started in the markets.
You don’t need to be a millionaire to start investing, with many investment accounts, such as the Invest.MT5 account with Admirals, you can open an account and get started with a small initial deposit.
The earlier you start investing, the more you will potentially benefit from its compounding effect over the long-term. Moreover, with interest rates as low as they are, any money which you leave in the bank gradually loses its purchasing power due to inflation.
Investing Mistakes – Final Thoughts
It is normal to feel intimidated when you begin investing and remember that making mistakes is a normal part of this journey. It is how you react and learn from your investing mistakes which will shape the type of investor you will be in the future.
Hopefully, after reading this article, you will be wary of some of the more common mistakes made by investors and know how you can try to avoid them.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.