7 Costly & Common Mistakes of Rookie Investors
We’ve all seen the figures of how if you start investing just a little each month when you are 30 or even 40, rather than waiting until you are 50, those extra years of interest can result in generating hundreds of thousands of dollars more for your retirement.
With this in mind, many people have a wake up call and decide it’s time to start investing. So they jump right in, with very little understanding of what the jumped into. They just know they want to increase their assets, and that they are supposed to invest.Â Â With these good intentions and yet no foundation of basic investment principles, many new investors end up learning the hard way what NOT to do. Some look back and realize they would have done better simply leaving their money in a basic CD or even a basic savings account!
While this article certainly can’t give you the kind of basic financial education that you must begin to acquire if you are to effectively care for your (hopefully) growing investment portfolio, it can warn you of some of the most common and most expensive mistakes of newbie investors, so that you don’t have to learn the hard way what NOT to do.
1.Â Being trigger happy: Trading too often.Â Â When you first start investing, the money always looks greener for every stock but yours. It’s all too tempting to keep moving your money around, from investment to investment. Either jumping from hot tip to hot tip, changing to the next big “can’t miss” opportunity, or bailing out without looking twice as soon as a stock starts to drop (There’s an old saying “You don’t sell your fishing rod just because it’s raining). Many noobies get trigger happy and start to make trades without learning more about the stocks involved and hearing the prognosis of a few qualified experts. Stock hopping also results in per-transaction fees which can very quickly put quite a dent into your investment income (to use another fishing analogy, it’s not unlike the difference between a young boy’s first time to fish- so excited and impatient and unable to sit still and simply wait, and an old timer, who has learned infinite patience mixed with an intelligent awareness of when it’s time for a change).
2Â Closing your eyes because the road looks straight: Getting too comfortable with the stocks you have and being too hesitant to sell. The corollary to number 1 is being afraid to sell investments, holding onto them too long and being too slow to sell your poor performers or even successful stock. Stocks with no signs of strengthening aren’t likely to suddenly become hot, while very few hot stocks can maintain strong positive gains over long periods of time.Â Â Keep up with the latest news and predictions about even your most consistent performer.
3. Jumping on a sinking ship just because the ticket is cheap: Buying stocks at their rock bottom lowest.Â Â How can this be a mistake? Very often,Â stocks that have fallen to a new low are being devalued for legitimate reasons, and aren’t likely to climb back up the charts.Â Â Stay away from them unless you have solid reasons to expect them to rebound.
4. Giving more than your getting: Investing while you still have high interest bad debt . In short, good debt is debt that is actually helping you in the long run, such as real estate mortgages or debt associated with other assets which increase in value enough to be profitable in spite of interest.Â Â Bad debt is debt which doesn’t help you earn more in the long run. If you are paying 12% , 15% or even $18% interest in credit cards or other debts, and your investment portfolio is most likely providing less than that, your investments are losing you money.
5. Grabbing the eggs without feeding the goose: Not reinvesting.Â Unless you are investing with a very clear short term goal such as paying for a car, house or vacation, all investment income should be reinvested. You can reinvest in the same company using aÂ Â Dividend Reinvestment Program (DRIP) or use your earnings to invest in different stock. This leads us to 6.
6. Keeping all your begs in one ask it: Putting all your funds in one investment.Â Â A diverse investment portfolio is almost always a healthy one, particularly if it includes a range of safer investments, mid range, and only the percentage of higher risk investmentsÂ Â you can intelligently afford to gamble with.
7. Going full speed ahead without a map or compass: Investing without self-educating.Â Â Yes, one great way to learn is by doing, but while you are doing, be continuing your investment education. Rather than getting over whelmed with all the information available, take it slow and steady. With even an hour or two a week of honing your financial intelligence, coupled with your gradually growing investment experience, you’ll be well on your way to having the tools you need to give yourself the financial situation you are both eager and intimidated to begin creating.
Here’s an excellent resource for starting your financial education.
MyMoney.gov is the U.S. government’s website dedicated to teaching all Americans the basics about financial education. Whether you are planning to buy a home, balancing your checkbook, or investing in your 401k, the resources on MyMoney.gov can help you do it better. Throughout the site, you will find important information from 20 federal agencies government wide.