Learn how to avoid common investing mistakes so you can grow your money to reach financial independence sooner.
I am excited to bring you a guest post today about investing. We have not been proactive about investing while on our debt-free journey but I wanted to present you with this information if you want to dip your toes into investing.
Today’s guest post is from Matt Davis of Un-Common Cents.
Matt Davis is a former investing and wealth management professional. He now focuses his time helping others become financially independent and live a
Common Investing Mistakes
Whether just starting, or experienced, there are many common investment mistakes people make. These are not necessarily mistakes due to of lack of information, but rather it’s usually a situation where there’s actually too much information; it’s tough to filter out what is important and what is not, and perhaps especially when one first starts investing.
Some of the most common mistakes are more pervasive than others, and some are more damaging than others. By being aware of some of the more common investment mistakes that people make, you can remove yourself from that undistinguished group and improve your chances of being successful over the long term.
Investing Money Based On A Hot Tip
One of the most common investment mistakes (and most dangerous, financially) is listening to your neighbor/friend/uncle/the guy on television or some random person that you just met at a cocktail party and then investing in some hot stock or other investment idea. Most people spend more time researching—and even agonizing over—their next cell phone, their next car, or their next TV purchase than they will about something way more expensive like a stock or rental property. And this goes for seasoned investors as well as new investors.
The “fear of missing out” is a powerful force and can lead you to follow detrimental “advice”. Before you make an investment–hot tip or otherwise–make sure to research to see if you understand it and see if it passes the smell test, even if that means missing out. Everyday, there are literally hundreds or thousands of opportunities. If you miss out on one, it’s okay. There are plenty of others that will be better suited for you and help you prevent one of the more common investing mistakes.
Investing While You’re Deep In Debt
Probably one the biggest, or at least most common investment, mistakes, especially by beginning investors, is investing when they are still burdened with tons of debt, particularly credit card or other consumer debt. Some of the best investments don’t usually return more than 10% per year, yet some people will carry a credit card balance with interest of 15- or 20-something percent. The credit card company is getting a great return while you’re getting killed.
It makes more sense to wait until you have completed paying off all your debts, especially high-interest rate credit card debt, before you start investing. However, if you have a modest mortgage with a decently-low interest rate and reasonable monthly payments, it’s probably okay to invest some money, but definitely not when you have high interest consumer dead. Not only is this one of the most common investment mistakes, it is also one of the costliest.
Not Contributing to Your 401(k)
It may seem completely counterintuitive to recommend not investing until all of your debts (at least all of the high-interest ones) are repaid in on breath and then proceed to recommend going ahead and investing in another breath, but there are some situations where it makes sense. Contributing to your 401(k) at work, if the company matches, is one of those situations where you might consider it. And if you are already in a good situation in terms of indebtedness and have covered your short-term obligations, not contributing at least to the amount of your company match percentage is giving away free money. Yet this is a common investment mistake that routinely occurs.
When your employer matches your contribution dollar-for-dollar, it’s like getting a 100% return on your investment…not to mention potential tax benefits. Even the best ponzi schemes don’t return 100%.
Paying Too Many Fees and Transaction Costs
Another common investing mistake that people make is paying too much or too many fees and transaction costs. There plenty of apps or programs that will let you invest for free or for very little money. If, for example, you only have $100 to invest, paying $10 in transaction costs to buy stock means you’ve already lost 10% on your return and you now need to gain 11% just to get back to breakeven.
Instead, apps like Robin Hood allow you to invest for free. This is especially great when you only have small sums to invest. Others like Acorns will let you invest for as low as $1 per month.
Diversification can come in many forms and is not overly complicated, but it doesn’t stop it from being one of the most common investment mistakes. Simplified, diversification is just the financial world equivalent of the saying “don’t put all your eggs on one basket.”
Some people think that by buying stock in WalMart and also in Target, they’re “diversified”, because they’re different companies. However, they are not diversified in the sense that they are (1) both in retail, (2) both large-cap stocks (“big companies”), and (3) their stores are predominantly found in the US. So instead, you could diversify by picking something outside of retail, a smaller-cap stock, relatively, or (3) buy purchasing stock in a company that has more sales outside the US (not necessarily headquarted outside the US).
You could further diversify by picking something entirely different like well-performing bond or real estate. The point is to have assets that won’t all go down at the same time or same rate if there is a downturn in the market (i.e. “correlated assets”). *Note: this does not mean to buy “one of everything” in the name of diversification.*
Not Having a Plan
If you’ve been budgeting properly, you should have an idea where your money is going and what monies are available for different categories. You can then methodically and thoughtfully plan how much to allocate to investing and over what time frame. Over time, markets will go up and markets will go down. Historically, US markets have gone up over long time frames; however there are periods when they’re down.
By investing a fixed amount consistently, sometimes you’ll buy when prices are a little higher, and sometimes when it’s a little lower. But overall you’re average cost will be somewhere in between (e.g. “dollar-cost averaging”). This will also be helpful in not needing to watch the market everyday and making a knee-jerk decision; it takes a lot of the emotion out of investing. Not having a plan is an easily avoidable, but common investing mistake.
Not Starting Early Enough
Some people wait until late in life to start investing. However, some people are forced by circumstances (like being heavily in debt) to wait until later in life to start investing. The faster you can put yourself in a situation to invest, the better to give your assets time to compound and grow.
There are literally hundreds of thousands (maybe even millions of reasons) that starting at 25 years old is better than starting at 45. As if you needed another incentive to budget and get your finances in order, being able to start investing earlier can mean the difference in a worried-filled and a fun and worry-free retirement.
Not Getting Over Your Mistakes Quickly
Another common investing mistake is following a bad investment decision with a worse one. Sometimes, when an investment goes bad, many people will hold onto the bad investment, thinking “if it just gets back to what I bought it for, I’ll sell it.”
Or sometimes even worse, they’ll throw more money at it, doubling-down on the mistake. Don’t let one mistake trick you into making another. This applies across the board in finances. Cut your losses, lick your wounds, and learn from that experience.
The converse is also true. Don’t let a prior mistake stop you from taking advantage of true opportunities and investing when you really should.
Certainly, there are many investing mistakes that people make, especially when they’re first starting out, or after getting their budget cleaned up. But by being aware of some of the more common investing mistakes, hopefully, you can recognize and avoid them. That way you put yourself in a better position to not only save money but ideally to make money in the long run.
*This article is for informational purposes. Nothing in this article should be considered specific professional investment advice and any companies or investments mentioned are not endorsed as an investment, but rather merely used as examples. If you want specific investment advice for your unique situation, consult a financial professional. *