Most people know that investing in the stock market is the key to building wealth. But, like with any other skill, there's a right way — and a wrong way — to start investing.
The goal here isn’t to scare you away from investing. It’s the opposite! Because knowing the most common investing mistakes that every investor has encountered will help you become better with your hard-earned money.
Here are seven of them — and what to do instead.
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1. Trying to Time the Market
In the media, investing is always portrayed as buying a stock, holding it for a few weeks, and then selling it for a profit.
However, the basis of most long-term investing strategies is to buy and hold.
What that means is you should buy investments designed for the long run. You want to own them until your end goal, like when you’re ready to retire.
READ MORE: How To Set Your Investment Goals
2. Acting on Emotion
People who are new to investing think that the most successful investors are the ones who know how to pick the right stocks at the right time or know when to cash out.
But in reality, the most successful investors are the ones who leave their emotions at the door. When the stock market starts to slide, many investors panic and sell. But that's the absolute worst thing you can do.
When you sell an investment that has lost value, you are locking in your losses. However, if you keep the investment, it might bounce back over time — and even grow in value.
Keeping your emotions in check means not making a rash decision based on current market trends.
Ignore the headlines that spell doom. These stories are designed to get clicks and attention, not necessarily to provide helpful information.
Humans are also notoriously bad at knowing when it's time to pull out of the market. There are many examples of someone selling because they thought the market had already hit its peak or buying because they thought the bottom was here.
No one knows what will happen with the stock market. So, it's best to use the dollar-cost averaging strategy, which means investing the same amount every month, no matter what the market is doing.
3. Failing to Diversify
We’ve all heard the expression, “Don’t put your eggs in one basket.” And there’s no better place to put that into action than with investing.
It’s an important rule of investing to diversify your portfolio. You should never have 100% of your money in one company, one stock, or one market sector.
For example, let’s say your investments are split between shares of Apple, Google, and Microsoft. In this case, all your money is in the tech industry.
This means you aren't properly diversified because if something goes wrong in the tech market, your entire portfolio will be negatively affected.
4. Not Being Risky Enough
One common investing mistake is when people feel uncomfortable with the uncertainty of investing and decide to be more conservative.
While this might sound like a valid strategy, it can hurt you later on.
Your risk tolerance changes over time. As you get older, you’ll want to be more conservative, since you have a shorter time horizon to recoup any losses.
But when you're young, you can afford to be more aggressive. This doesn't mean buying and selling stocks daily — it just means having more of your money in stock funds, like an S&P 500 index fund.
READ MORE: What To Look for When Buying Stocks
5. Starting Too Late
One of the biggest ways you can succeed as an investor is to start early and invest consistently.
If you wait too long, you won’t see the gains that you would have otherwise. This is due to the power of compound growth.
Investments grow over time, and the more time you give it, the better it'll be. It's like using a slow cooker. If you only give it a couple of hours, your meal might be bland or undercooked. But if you give it the right amount of time, then you'll get a flavorful dish without much effort.
READ MORE: There’s Never a “Good” Time To Invest — Why You Should Do It Now
6. Not Understanding How Securities Vary
If you don’t understand the differences between the various asset classes, you won’t know what to buy.
While you don’t need to know every bit of investment lingo, you should at least know the following:
- Stock: A share of a stock represents ownership in a company. If you have a share of stock, you own a small amount of that company.
- Bond: A bond is a debt instrument, which means that someone, like a municipality or a company, owes you money.
- Mutual fund: A mutual fund is a basket of stocks and can be a good way to diversify your portfolio.
- Exchange-traded fund (ETF): An ETF is like a mutual fund, but can be easier to trade.
- Index fund: An index fund tracks a particular index, like the S&P 500 or Russell 2000.
READ MORE: 25 Investment Terms to Know If You’re a Beginner Investor
7. Not Actually Investing Your Money
One of the most common investing mistakes is contributing money to an IRA, 401(k), or other investing account but not actually buying investments with those funds.
Here’s what I mean: Let’s say you decide to stash 10% of your salary in your IRA, which equals $500 every month. So, every month, $500 is deducted from your checking account and sent to your IRA. Voila, you think you’re investing.
However, that’s not what investing means. You still have to manually choose which investments you’re purchasing with that $500. That might include an index fund, a bond fund, or an international stock fund.
If you don’t choose what to invest in, your funds will sit in the cash portion of your account, which doesn’t grow. This means you could actually end up losing money because the account will be worth less due to inflation.
FAQs
What investments are the riskiest?
There is no specific investment that is the riskiest; it all depends on your age, your reason for investing, and what else is in your portfolio.
For example, buying a share of Apple stock is not inherently risky. However, holding all your money in Apple stock is risky. The same is true for cryptocurrency, your own company’s stock, or other individual stocks.
In general, you should try to limit risky investments to 5% of your total portfolio. That will ensure you’re still protected.
What investments are best for beginner investors?
One of the best types of investments for new investors is a target-date fund. These are funds that are linked to a specific time.
For example, a 2065 target date would mean you want to retire in 2065. When you invest in a target date fund, the investments will change over time to account for your age.
If you purchase a target date fund in your 20s or 30s, it will be more weighted towards stocks. However, as you get older, the balance will change and it will have more bonds.
This is truly the most set-it-and-forget-it way of investing.
TL;DR: How Do You Overcome Investing Mistakes?
They say the best time to plant a tree was 20 years ago, but the second best time is now.
If you are making one or more of the investing mistakes mentioned above, it's not too late to reverse course.
If you're feeling overwhelmed or anxious, talking to a qualified financial planner can be helpful. They can recommend the best course of action to help fix your mistakes. You can find a qualified financial planner through the XY Planning Network, the National Association of Personal Financial Advisors (NAPFA), or the Garrett Planning Network.
For more tips on managing your investments, check out these episodes of the Erika Taught Me podcast:
- Investing in the Stock Market Explained: A Guide For Beginners
- How To Invest for Beginners (Step by Step)
- Investing Advice from the Most Powerful Woman on Wall Street
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