What are the worst mistakes to avoid as an investing beginner? What are the common mistakes investors make especially when they are just beginning their investment journey? Well, I advice you read on to find out. If you are just entering into the world of investing, chances are that you will make many mistakes as you trail the path to financial success. Some of these mistakes could result in financial disasters that will cripple your ambition.
Now regardless of the investment product you choose to buy (stocks, commodities, bonds, real estate, startups), there are challenges you will face and mistakes you will make. However, by becoming aware of such mistakes, you will be able to avoid them and boost your chances of success. After all, it is much better to learn and profit from the mistakes of others than yours.
So to achieve your investment goals within a relatively short period, you must avoid these 10 common investing mistakes that most beginners make:
Top 10 Stock Investing Mistakes to Avoid as a Beginner
1. Having no investment plan
Venturing into investing without having a plan is like starting a voyage without a compass. You will end up as a loser. Before you start investing, you must have a personal investment plan or policy that include your goals and objectives, the risks that are relevant to your chosen investment style, the benchmarks for measuring your success, and your plans to diversify your investment.
Having a plan will keep you focused and disciplined, and will help you adhere to a healthy long-term policy even when market conditions are unfavorable.
2. Putting all your eggs in one basket
Another common investing mistake that beginners make is investing 100% of their money in a single type of asset. This is far from being a good decision. Most investors even go through the pain of investing in stocks in several industries and sectors. However, this is not true diversification because you are still focused on paper assets.
As a beginner, you should always commit less capital into any market you plan to invest in. This will help you study the market better with time. Once you have better knowledge of that market and you are more familiar with how things work, then you can afford to take bigger risks. To be truly diversified, you should invest in paper assets (stocks, bonds, insurance) and hard assets (Real estate, gold, businesses).
3. Investing cash reserves
Yes, you have a burning zeal to bump into the investing world and start making huge fortunes later. That’s good, and that’s just the same motive every investor has. But most of the time, you will have this strong urge to pump all the money you have into your investment. Never give in to this urge, as it would make you regret bitterly in the long run.
Having an investment doesn’t mean you should have no liquid assets left. You should always set aside a good amount of cash for emergencies and opportunities that may never come again. Granted, saving your cash brings no returns, but investing everything is very risky as well.
4. Investing with borrowed money
Most brokers will always encourage you to go ahead with margins. They will tell you that you stand the chance to make big money that way. You see, they only want to milk out maximum brokerage from your account. So, you must never fall for this trap. Also, avoid taking loans in order to invest. Investment is risky, and so it shouldn’t be done with borrowed money; especially when you are a beginner.
5. Banking on rumors
It’s natural for new investors to be overly enthusiastic about stocks. They are trying to find all sorts information from the internet, veteran investors, magazines and newspapers, brokers, and their friends.
As a newbie, never attempt to predict stocks that will appreciate like crazy (by way of guessing or rumors) or those that will fall. This is an art that is practiced and perfected over time with lot of effort; it’s not as easy as you think. Invest only in businesses that you understand.
6. Jumping in head-on
Investing thrives on only one golden principle – buy low, sell high. Most new investors make mistakes in telling what is low and what is high, especially in a market where decisions are based on various factors and technical parameters. Buyers buy at prices that they think is low enough – the same prices that seem high enough to the seller.
Now, you can see that different conclusions can be drawn from the same market information. So, it’s very important that you study how to make decisions based in market parameters before jumping in. Before investing at all, you must know the right price for you to enter, the right time for you to invest, the amount of risk to take, and so on.
7. Not learning the basics
You will find may self proclaimed investors who don’t understand basic investment terms like support and resistance, volume, P/E, market cap, all time high, 52 week high, stock index, all time low, and so on. Always take your time to learn and understand these basics. The more you understand them, the clearer it becomes to you that the market is very complex.
8. Yearning for quick gains
Most new investors enter into the market because they expect to start raking huge profits within a few months. This desperation leads them to making many mistakes, which eventually force them out of the market. You see, in investing, there are no quick gains, as profits accumulate over a long time.
This could be more than 20 years. In fact, to most experienced investors, a short-term investment is one that is set for less than 3-4 years. So, to them, a 2-year investment is a short-term one. Ironically, most newbie investors would consider this as long-term. So, if you are finding a means to get rich overnight, don’t consider investing.
9. Following the crowd
Even though joining the bandwagon may be a smart decision most of the time, it rarely helps in the investing world. In fact, if you are looking for a proven formula for losing your money quickly, try following the crowd (by buying when everyone buys and selling when everyone sells).
10. Sticking with losers
Most newbies hang on to shares that are depreciating, even when indicators are signaling that these shares won’t pick up again. They do so with the hope that the shares would pick up again sometimes in the future. This is a very practical way to see your money melt down like a burning candle. Once market indicators show that a stock is dying, quickly jump off its boat, rather than follow it down a bottomless pit.
By avoiding these common mistakes, you will easily meet your investment goals and save yourself from lot of regrets. Even though some of the tips given above may not make you an investment expert, they will keep your feet firm on the path to success in the world of investing.