Investing your money, whether in the stock market or a retirement account, is a good way to take advantage of compounding interest and secure your financial future. However, understanding risk levels and investment products can take time, and many new investors fall into the same trap as they navigate financial markets and make decisions about their money.
Here are some of the most common mistakes that first-time investors make—and how to avoid them.
Mistake #1: Not Selecting the Right Advisor
Financial advisors can teach you about financial markets and products and provide helpful input as you make decisions about your money. However, your parents’ or friend’s financial advisor might not be the best advisor for you.
Rather than choosing someone you know works with, do some research yourself. You’ll want to ask what type of clients these potential advisors typically work with, what they could do for you, what their investment philosophy is, and what services and products they offer.
Mistake #2: Making Trendy Investments
Likewise, don’t make investment choices based only on the recommendations of others. Be particularly wary of celebrity endorsements. Companies may be using celebrities’ fame to try to get you to invest. In some cases, celebrity-endorsed investment products are scams.
A better practice is to research the investment product. Does it fit your financial goals? In choosing this product, are you just going along with a trend or will the product truly be a good addition to your portfolio?
Mistake #3: Making Your Own Market Predictions
It makes sense to buy stocks when the market is low and sell them when it’s high. But the real art comes in figuring out the timing. Is the market at its highest point now, or should you wait one more week to sell? Is this really rock bottom for this company, or could you wait one month and get it for even better deal?
Rather than putting energy into predicting a stock’s ups and downs, financial advisors recommend taking a long-term, measured approach to investing. That means buying shares on a regular schedule rather than basing purchases on market predictions.
Mistake #4: Being Overconfident
Some first-time investors enter the market with an abundance of confidence, sure that they will get big returns on their well-timed stock purchases and sales. However, overconfidence can lead to major rookie mistakes, according to financial planners.
Most importantly, don’t misinterpret the market’s movements as confirmation that you made good decisions about the timing of your investment. Trading often to “beat the market” typically doesn’t work, even for investors who read the news and keep up with trends.
A better approach is to slow down on trading decisions and focus on creating a diverse array of investments. When you take a realistic viewpoint about your investment decisions and returns, you’ll make better decisions that will get you closer to your financial goals.
Mistake #5: Overvaluing Cost
In the stock market, the sticker price isn’t always an indicator of value. For example, a $6 stock may not be a bargain if the company is new and unproven. Likewise, a $3,000 price tag is not necessarily an indicator that the stock is valuable.
Rather than drawing assumptions about stocks based on their price, new investors are advised to research each stock’s value by looking at factors such as their past performance, growth potential, and leadership.
Mistake #6: Panic Selling
When the stock market tanks, it can be hard to resist the urge to dump your stocks in fear that the market will drop even lower in coming days. However, more than 90 percent of investors identify this emotional reaction as a top mistake that investors make. Unfortunately, panic selling typically ends in financial loss.
That’s because selling stocks at a low price locks in your losses and eliminates any chance you have to benefit from the almost certain recovery that will follow. For example, in March of 2020, S&P losses totaled 34 percent, and in the US, investors sold out of more than $325 billion in mutual fund positions, according to Strategic Insight. Those investors then couldn’t take advantage of the market’s 20 percent rebound a month later.
Financial advisers recommend laying low when the market turns downward. Stick with a long-term investment strategy instead of short-term decisions and wait for the inevitable market correction that will erase those losses.
Mistake #7: Holding on to Returns
While it may be tempting to spend your returns, or earnings, from the market, a better strategy is to invest them back in the market. This practice, which is called compounding, will help your money grow faster. With a commitment to savings and compounding, over time your investments should flourish.