Investing in stocks, bonds, funds, and other financial instruments is an excellent way to grow your money over the long term. However, there is a degree of risk involved. You should always ensure that you have an emergency fund of 3-6 months’ worth of income saved up before you start investing. If you want to be extra cautious, having another $10K saved in a certificate of deposit (CD) will also help you weather any sudden storm in your life which requires money. Once you have the funds to invest, avoid making the 9 common mistakes below which trip up thousands of people who invest haphazardly.
1. Not Understanding What They’re Buying
Before buying shares in a business, you must understand what the business is all about. While you don’t need to understand the intricacies of running the company, you should have an idea of what they do. Very often, people look at Warren Buffet as a genial senior who seems to get by just investing over the long run. What they don’t know is that Warren spends most of his time reading reports on the companies before investing in them. You must be well-informed before investing. Don’t invest based on ‘hot tips’ you get from your Uber driver or your hairdresser.
2. Mixing Savings and Investments
As mentioned earlier, your savings are meant for emergencies. Cash in the bank is liquid and you can access it fast. Furthermore, while inflation may slowly chip away at its value, cash in the bank is far safer than cash used in investments. Do not risk your savings to invest. Keep the 2 separate.
3. Lack of Patience
Seeing rewards from investing takes time. You must play the long game here. Looking at investing as a ‘get rich quick’ scheme will see you making impulsive trades and you may be overconfident. Slow and steady wins the game here.
4. Putting All Your Eggs in One Basket
Companies can collapse. Just look at Blockbuster, Compaq, Toys R Us, etc. While a stock may be profitable and rising in price right now, avoid putting all your money in just one stock. This is very risky. You must diversify your investment portfolio.
5. Not Monitoring Your Investments
This is a common mistake many people make. They invest in stocks and after a while, they get bored and forget to monitor their investments. Unlike unit trusts or mutual funds where the money is managed by a fund manager, if you’re investing on your own, you’re the one who needs to pay attention to your investments. Markets fluctuate and you may need to rebalance your portfolio. You may need to drop losing stocks and purchase winning ones. Never make the mistake of assuming that a stock’s price will inevitably rise over time.
6. Unrealistic Expectations
Generally, the people who make the most money in stocks and investing are those who already have a lot of capital. Money makes money holds true here and the scale of investing leads to exponentially higher gains. So, tailor your expectations and don’t expect to become a millionaire overnight. While you should invest your money, you’ll also want to find other ways to increase your income. The more income streams you have, the faster you’ll build wealth.
7. Trying to Time the Market
This is a practice where people try to predict future market price movements and they make buying or selling decisions based on their predictions. This is nothing more than gambling and is risky. Unless you have a very good knowledge of the markets and how they’re interconnected, it’s very difficult to time the market. Watching Billions on Netflix isn’t going to make you an expert here. It’s best to take the long, gradual and sensible approach if you’re not immersed in the trading gymnastics Wall Street is engaged in.
8. Not Thinking Long-term
Investing yields the best rewards over the long term. Don’t trade too much and too frequently. This is unnecessary. Choose stocks in companies that show promise and watch their performance over the long run. As they do better, the share price will increase and your investment will appreciate in value.
9. Paying too Much in Fees and Commissions
Research how much you’re paying in fees/commissions to the brokerage firms, etc. See if you can cut your costs. The goal of investment is to make your money grow as much as you can without a considerable chunk of it going to others who barely take on any risk. These 9 mistakes can sabotage your chances of success when investing. So remember them and steer clear of them. “Investors should remember that excitement and expenses are their enemies.” – Warren Buffett