Not Investing
One of the mistakes that beginner investors may make in their investment journey is not investing. Retirement is expensive, and unfortunately, most of us will not be able to save enough without significant help from the stock market.
Imagine saving $250 a month from age 25 until you retire at 65. If you kept that amount in a bank account that does not earn interest, you would only have $120,000 by the time you retire. Unfortunately, this amount is unlikely to be sufficient for a long period.
However, imagine if you invested this amount in the stock market and allowed it to compound, meaning you earn interest on your interest. According to the Securities and Exchange Commission (SEC), the stock market has had an average annual return of about 10%.
With that, you would have over 1.4 million dollars by the time you retire with a monthly contribution of $250. The contributions themselves over your lifetime would be much higher when investing in the stock market instead of a non-interest-bearing account.
Buying Stocks in Companies You Don’t Understand
Another mistake is when investors head towards the latest “hot” industry but know nothing about the company or industry. Without proper research, you risk your precious money, especially if you don’t understand the company’s financial health. However, when you research and understand the business and industry, you have a naturally built-in advantage over most other investors.
Putting All Your Eggs in One Basket
When you put all your eggs in one investment, a single negative event can wipe out your entire portfolio and thus your financial future. Diversifying your portfolio helps reduce risk so that if one of your investments performs poorly, it won’t necessarily affect your entire portfolio.
You can diversify across asset classes, such as investing part of your money in stocks, bonds, and real estate. If the stock market crashes, for example, the bond market may perform well, helping to mitigate losses incurred from stocks. Another way to diversify is to invest in multiple companies within one industry. You can also buy several sector funds, with each fund focusing on one industry, such as technology or financial services.
Note: Investing in index funds or mutual funds or exchange-traded funds (ETFs) is an easy way to diversify your portfolio through just one investment.
Expecting Too Much from the Stock
Another investment mistake is expecting too much return from a stock, which can be particularly true when buying low-value stocks. Low-value stocks can seem like lottery tickets, allowing a $500 or $2,000 investment to turn into a small fortune. However, there is a significant risk of loss with low-value stocks, and investors who expect a small company’s performance to outperform its peers may be disappointed. It is essential to have a realistic view of what you can expect from a company’s stock performance.
Note: Review the historical performance of the stock you are interested in and decide based on the company’s financial performance, trends, and historical gains of the stock. While past performance is not a guarantee of future results, it can be a good starting point as it provides insight into the stock’s volatility and trading activity.
Using Money You Can’t Afford to Lose
When you invest money that you cannot afford to lose, your emotions and stress levels rise, which can lead to poor and rash investment decisions. When evaluating stocks, look at your risk tolerance, which is your willingness to lose part or all of the original investment for higher returns. When determining your risk tolerance, assess the securities or asset classes you feel comfortable with, such as growth stocks versus bonds.
Don’t
You should invest money that you can afford to lose, such as rent money or emergency savings. On the other hand, you will make much better investment decisions when investing money that you can afford to lose.
Rushing into Decisions
Another investment mistake is a lack of patience. If you are investing for the long term, stocks may not provide the desired gains immediately.
If the company’s management team reveals a new strategy, it may take months or even years for that new strategy to yield results. Often, investors buy the company’s shares and then expect the stocks to perform in their favor immediately.
For example, the broader S&P 500 Index provided an average annual return of 9.01% from 2000 to 2021. This includes many years in which the index saw negative returns, including the significant recession in 2008, when it dropped by 36.5%.
Note: What often makes investing profitable is the magic of compounding. Compounding takes time to work effectively.
Source: https://www.thebalancemoney.com/common-investing-mistakes-you-must-avoid-4104189
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