Source: Go High Brow
Several new investors have been drawn into the market since the pandemic began. It was the perfect opportunity to start investing during the pandemic: securities became more affordable when the market declined, interest rates on savings accounts were slashed in half, and young people were stranded at home with little to do.
Many people make the same mistakes when it comes to investing their money. Let’s take a closer look at some of the mistakes people make when investing!
Investing without really understanding
A straightforward reason beginners buy stocks is they believe they will make money. Yet when you ask them what the underlying business is behind the ticker symbol, they cannot explain it. Although they watch the company’s stock chart daily, they have never read a single page of its annual report.
Is the company located and what does it do? Are there any long-term competitive advantages and ages? How long can the company grow? Is there any significant risk? How closely do the CEO and management align with shareholders? How did the company perform financially over the last five years? Are its finances strong?
Although this list of questions isn’t meant to be comprehensive, it can give you a good starting point for your research.
Lack of patience
Most investors are looking at the short-term when investing in equities or mutual funds. When returns fluctuate, investors are often tempted to retreat from quality investments or liquidate their assets to make short-term gains. Because of this, many people don’t realise the long-term benefits of staying invested for long periods. Investors must be patient and allow their investments to grow to generate wealth over time. You should hold investments for as long as possible to maximise your returns. When you invest, you do it with the expectation of reasonably high returns over a longer-term.
The importance of diversification in a portfolio cannot be overstated. Diversification is imperative, but it has to be done correctly. It doesn’t necessarily mean investing in multiple similar investments. In the case of large-cap funds, for example, an investor should place money in a maximum of two funds to ensure positive returns. As the underlying equity stocks of these funds will be more or less identical, investing in five or six large-cap funds makes no sense. An investor who diversifies too much will only increase costs and dilute returns.
Putting all your eggs in one basket
Investing in a diverse portfolio is another critical factor. Investing all their money in a single investment can be risky, especially if they are participating in equity markets. An equity market is volatile and, as a result, can drain away from the capital invested. Diversifying their portfolio and earning better returns with reduced risk is possible by specialising in various investment options.
A common mistake investors make is to chase trends. Many investors choose a stock based on its “looks cool” rather than on why it is a hot investment.
Put your money in the market only after your due diligence. You could also use an index fund to invest passively in the markets and watch your portfolio grow over time. Buying diversified mutual funds and index funds through your brokerage account reduces your risk compared to buying stocks.
Investing against your investment goals or style
It should be possible for investors to choose investments based on their investment style or objectives. Without the same investment portfolio, expectations will not be met. A selection of investments should be based on factors such as risk appetite, expected returns, investment costs, investment horizon, etc.
Following unreliable advice from social media
One key piece of advice that experts provide is: Don’t take investment advice from someone who doesn’t know your financial situation. Social media may pressure you into investing in a particular company, but they aren’t aware of what other investment options are out there. If your employer matches your contributions to a certain percentage of your salary, putting that money in your company-sponsored retirement account may be a better choice.
You should always research when investing and read reviews of the person giving financial advice on social media platforms like TikTok.
Investing money you’ll soon need
The biggest mistake investors make is jumping into the market without building a solid financial foundation.
Your money should feel in your hands before you invest it. It’s also helpful to build a cash reserve so that you won’t need to turn to your investments when you run into an emergency or wish to make a purchase. If you’re saving for a down payment on a home you want to buy, it wouldn’t be good if you lost your money on the stock market.
It’s essential to understand whether you have a healthy amount of money in a savings account set aside for all your near-term goals before investing. Stocks cannot be invested with the money needed in just a few years.
Delaying investing altogether
Finally, not investing at all is a costly mistake. The rising inflation rate means that money deposited in a bank account loses its purchasing power. Investing can be so terrifying over the long run that people don’t even begin because of the compounding effect.
To ensure a successful investment portfolio, every individual needs suitable investments. An investment portfolio that is well designed can help investors increase their wealth and earn maximum returns.
Risk is part of investing, no doubt about it. You can, however, avoid some errors altogether. Especially if you’re a newbie investor, you need to avoid the common mistakes that many people make to maximise your investment and get favourable returns.
All the best in your investor journey!