The 6 Biggest Mistakes New Investors Make
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Investing is exciting. When you first enter the world of stocks, bonds, real estate, and the limitless other capital investment options, all you can think about is the sheer potential of your financial decisions. Unfortunately, your lack of experience may limit that potential, or sabotage it all together. There’s no way for a novice investor to earn or replicate the same level of expertise and wisdom that an investor with many decades of experience has, so it’s almost inevitable that you’re going to make mistakes.
This shouldn’t dissuade you much; some mistakes are valuable learning opportunities, and very few will totally break you. Still, if you can avoid some of these rookie mistakes, you should.
Why New Investors Are Vulnerable
New investors have access to the same information and advice as older investors, so why are they more vulnerable to investment-related mistakes?
- Lack of firsthand experience with fluctuations. All investments fluctuate in riskiness and return—especially the stock market, which can bounce up and down based on thousands of variables. If you haven’t experienced this volatility firsthand, it may leave you unable to visualize worst-case scenarios or adequately prepare for the future.
- Overconfidence in assumptions. By the time you’ve racked up a decade of experience, you’ll have made enough errors to know that many of your assumptions are probably wrong. However, when you’re new, you’ll have the tendency to overestimate your own knowledge. You’ll have too much faith in your assumptions, and you’ll be more liable to make mistakes as a result.
- Haste and excitement. New investors are also more excitable and enthusiastic, not to mention more liable to chase fast returns. That haste and excitement can make the process more enjoyable, but it can lead to poor research and poor decision making.
The Biggest Investing Mistakes
With those qualities at play, what are some of the biggest mistakes new investors make?
- Having no long-term strategy. When you jump into investing for the first time, you’re thinking about what looks good to you right now—and in some cases, that’s beneficial. However, you’ll also need to have a long-term strategy in place if you want to continue seeing decent results. For example, how much do you want to have saved for retirement? How are you going to rebalance your portfolio a decade from now?
- Failing to diversify your portfolio. Speaking of portfolios, new investors often lump most of their capital into one or two investment types. However, it’s far better to diversify your portfolio; hedging your bets among multiple investment types will guard you against possible fluctuations and help you see more consistent returns over the long term. This becomes even more important as you get older.
- Relying on the same sources for news. It’s good to rely on the news to help make your investment decisions; for example, a major company acquisition could be a sign of future growth, or you might read an article recommending a new startup as an investment opportunity. However, it’s important to diversify the sources you read as well. If you consistently read the same types of articles by the same people, you’ll limit your potential and trap yourself in an echo chamber.
- Depending on fund managers and advisors. Fund managers and advisors are responsible for making financial decisions on your behalf. They’re often well-educated and have a history of making good decisions. However, they also charge you fees and can’t always guarantee their performance. It’s oftentimes better to rely on your own decision making skills, as you know your goals better than anyone else.
- Trading too frequently. In the stock market especially, it’s tempting for new investors to trade often, seeking quick profits and fast returns. However, this strategy is akin to gambling; instead of riding out the short-term fluctuations in favor of reaping the benefits of long-term trends, you’ll be hoping for the best to come out of nearly random changes in stock prices. Fast decisions are sometimes important, but you also need to know when to buy and hold your investments.
- Putting too much faith in numbers. Numbers are important because they guide you in making more objective, calculable decisions. However, it’s easy to put too much faith in certain numbers over others. For example, you might be scared away from an otherwise good investment, just because a P/E ratio is too high or buy a bad stock because of decent quarterly sales. Look at the big picture, not any one statistic, to make your decisions.
The Good News
The bad news is you’ll almost definitely make some of these mistakes, even if you’re aware of them. The good news is that it’s not really a big deal—especially if you’re young. If you get burned on an investment decision, you’ll have plenty of time to make up for it, and because you’ll feel the sting on a personal financial level, you’ll be unlikely to ever make that mistake again.
Accept the reality that some errors are inevitable, and instead focus on making the best decisions you can.
Note: The author of this article is Larry Alton. He is a contributor to ValueWalk.com.
Category: Investing in Penny Stocks
