13 Mistakes Beginner Investors Make
As a beginner investor it’s important to know what mistakes people made before you. You have no reason to go out on your own and reinvent the wheel. People have gone before you and made all the mistakes. You can learn to do it right the first time.
Here are 13 common mistakes you'll want to avoid.
- Paying More Fees and Commission Than You Should – Do your due diligence to choose the right brokerage firm based on whether you want a full service or discount broker. Compare apples to apples and choose the best brokerage for your needs.
- Owning Multiple Mutual Funds – Most mutual funds are invested in different quantities of the same stocks and bonds. You only need to invest in one mutual fund. If you have more money to invest, choose another investment or put more into the same fund.
- Basing Expectations on Past Growth – You will be asked to understand that investing is a long-term situation with gains of about 11 percent seen in a 20-year time period. However, when you are choosing one particular fund or business to buy stocks in, don’t use the past as your guide. Use the news and financial projections because a business can be fabulous, but the stocks and earnings pretty much maxed out.
- Making Choices Emotionally – This can happen while watching the news. You see a story about something and it either makes you excited and you run to your computer to buy that new best thing, or you sell out due to some doomsday report. This is a dangerous practice. Use common sense and take your time researching before changing any investment.
- Thinking a Great Business Means a Great Investment – There are many great businesses out there that are super profitable. However, their stocks are maxed out and they aren’t going to see growth in the short or long term. Sometimes you just miss the boat. Look for the next new thing to come along instead.
- Believing High Dividend Payouts Are Good – When a company is paying high dividends it doesn’t really mean anything good. Sometimes they are only paying high dividends to attract investors, or it might mean than the stock value has been reduced, or something else is wrong. Sometimes a company that pays high dividends is a good choice, but don’t make that your only criteria.
- Making Too Many Trades – Each trade incurs a fee; therefore making too many trades could cost you more than you earn when it’s all sorted out. Be sure you are making a trade for a good reason, not emotionally based. Take your time, do your research and make trades with a lot of thought behind them.
- Not Fully Funding Tax Favored Retirement Accounts – Individual retirement accounts such as 401(k)s and Roth IRAs should be fully funded before you choose to invest in anything else. If you don’t do it, you’re throwing money down the drain.
- Not Saving for a Rainy Day – By the same token, before you save any money at all for investing you should have available 8 to 12 months of basic bare bones living expenses. You can, by the way, keep that in a Roth IRA and get to it without penalty, and pay it back.
- Not Contributing the Max with Employers – If you aren’t contributing the most you can to your employer’s investment opportunity to get the most in matching funds, you’re throwing money in the trash. For example, if your company will match 100 percent of your contributions up to 10 percent of your income, and you are not contributing enough to max that out, you’re leaving money on the table.
- Spending 401(k) Money – When you switch jobs, don’t take the 401(k) out in cash. Instead, roll it over. If you take it in cash you’re going to pay a penalty and ruin your chances of maxing out your retirement savings.
- Watching Financial News – The fact is, financial news is often slanted to favor advertisers. Plus it can really cause you to lose faith in your own choices. Choose sources that aren’t slanted by advertising. It is best to choose one or two gurus that you’ve researched well rather than to get your advice from a paid TV announcer.
- Not Starting Sooner – The fact that compounding interest starts sooner rather than later is an essential component in seeing success in investing. The market is a rollercoaster and over the short term isn’t always a good investment. But, over the long-term history it has shown an average of 11 percent earnings over 20 years.
Avoiding these mistakes will ensure that you have a successful investing experience. Find an expert that you trust, a good brokerage firm, set your goals and keep going until you succeed.