Investing comes with ups and downs — which can lead beginner investors to make rash decisions that could be costly in the long run. Here are some tips for avoiding common mistakes that new investors make.
Investing critical funds
Beginner investors need to understand that the stock market isn’t a way to get rich quickly. Rather, it’s often the opposite — your investments may suffer short-term losses, but overall, they are likely to provide long-term gains. You should expect your money to be tied up in investments for extended amounts of time. And as a result, you shouldn’t invest the money you need to use to pay rent, buy groceries, and keep your lights on. Investing expert Peter Leeds suggests that you only use money that you can afford to risk, and leave your emergency savings and needed funds out of the stock market.
Investing in a company you don’t understand
When other investors flock to a hot company or industry, it can be tempting to throw your hat into the ring without doing your homework first. But before you pour your money into a company, be sure that you understand how that business fits into its industry, its plan for growth, and the risks associated with your potential investment. While Leeds explains that you don’t need to be an expert on every company you invest in, it helps to have a concrete understanding of what you’re getting into, rather than simply following the crowd. And if you don’t have the time or energy to read up on every venture before you invest, Leeds suggests bringing a financial advisor on board to help.
Failing to diversify
If you only invest in a few industries, you can find yourself suffering losses if that segment of the economy takes a hit. To avoid this, diversify your investments, so inevitable downturns don’t have as big of an impact on your overall portfolio. Financial advisor and Investopedia contributor William Artzberger suggests building a diversified portfolio by investing in mutual funds and exchange traded funds.
Too much turnover
Investors play the long game. When one of your stocks isn’t turning as quick of a profit as you’d like, resist the urge to dump it and reinvest. This is because transaction costs can add up quickly — and put a major dent in your money. Artzberger also warns that you could find yourself paying excess taxes and missing out on long-term profits. On top of that, you could suffer the opportunity cost of skipping out on a long-term investment.
Keep your emotions in check
It can be stressful to see the market fluctuate and mess with your hard-earned cash. Artzberger reminds investors that despite short-term fluctuations, markets have historically grown over the decades. In other words, it pays to be patient. To avoid the temptation to stress over the health of your investments, Artzberger suggests putting your plan on automatic. Make time every year to review the performance of your investments, rather than checking in on them every day or week. By viewing the big picture, you could find that you’re able to enjoy watching the market’s incremental long-term gains, rather than focusing on short-term losses.
For more advice on getting started with investing, contact a financial advisor.
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