Top 7 Beginner Investing Mistakes (DON’T DO THIS)

Investing can be an absolute minefield, especially when you’re just starting out. There’s an overwhelming amount of information, and everyone seems to have their own take on what’s best. The road to investing success is often littered with missteps and pitfalls. To help you navigate this confusing world, let’s delve into seven common blunders that beginners often make when they venture into the investing world.

Mistake #1: Never Getting Started

One of the biggest pitfalls is simply failing to begin. You might be waiting for the perfect moment, or maybe you’re scared of losing your hard-earned money. Or perhaps the thought of wading through investment jargon is enough to make your head spin. But the thing is, there never really is a ‘perfect’ moment. The longer you delay, the more potential gains you miss out on. It’s about biting the bullet and taking that first step, no matter how small.

I can’t tell you how many friends and family have called me excited about getting started investing at some level and talked to me for over an hour, but never followed through with the next steps. Taking the first steps is crucial when you feel that urge that you need to get involved in the stock market. Few even take those first few steps of setting up a brokerage account and depositing money. Be different, start at step one, and follow through.

Mistake #2: Not Having Extra Money to Invest

For many people, there’s this belief that you need a hefty sum to start investing. But that’s simply not true. Often, it’s the little amounts that add up over time. The trouble begins when you invest money you might need for an emergency or essential bills. This could put you in a tight spot financially and force you to sell your investments prematurely.

Your investment capital is the difference between what you earn and spend. You can’t invest without money left over from bills and debt payments. You must master your personal finances before you can start investing. You can start at zero as an investor but you must be able to convert some of your earned income into investment capital through deposits.

Mistake #3: Not Choosing the Right Broker

Choosing a broker is a big decision. They’re your gateway to the markets, so you’ll want to ensure they’re the right fit for you, or even just legitimate you will be able to get your money back out. Some beginners choose a broker based on low fees, but there’s much more to consider. It’s safest to stick with the largest well-known brokers in your country that are regulated. You also want a legitimate broker that executes your trades in the open market, many forex brokers are just bucket shops that take the other side of your trade with no market execution. Also, there are no “money managers” on social media, real money managers operate funds they’re not on social media promising impossible returns. Be careful out there. Start with putting your money in a smart place.

Mistake #4: Not Having an Investment System

Without a solid system or strategy, you’re just randomly gambling with no edge and no repeatable process to make you successful. The odds are you will lose money. Some beginners just pick stocks haphazardly, hoping for the best. But successful investing needs a well-thought-out plan. It’s essential to consider your financial goals, risk tolerance, and time horizon. That way, you can select investments that align with your personal circumstances and aspirations. You must create an investment process with a positive expectancy based on historical patterns and results.

Mistake #5: Getting Emotional About Investments

Investing can stir up a whirlwind of emotions. There’s the thrill when your investments rise and the panic when they plunge. Some beginners let these emotions guide their decisions, which can lead to buying high and selling low – the exact opposite of what you want to do. It’s crucial to keep emotions in check and stick to your investment plan, no matter how the market behaves.

Mistake #6: Not Optimizing for Taxes

Taxes can take a significant bite of your investment returns if you’re not careful. Some beginners overlook this aspect, only to be taken aback when they receive their tax bill. It’s worthwhile to explore tax-efficient investing strategies, like using tax-advantaged accounts or holding onto investments longer to qualify for lower long-term capital gains rates. Be aware even when successful you will be taxed for all gains outside a tax-deferred account. This is why it’s best for most new investors to start with a traditional 401k or IRA to avoid taxes for a long time.

Mistake #7: Not Choosing the Right Activity Level

Finally, it’s essential to decide how hands-on you want to be with your investments. Do you have the time and interest to monitor the markets and make regular trades? If not, perhaps a passive investing approach, like buying and holding index funds would suit you better. Conversely, if you’re too passive and neglect to review your portfolio regularly, you might miss out on opportunities or fail to spot issues early on.

Remember, investing isn’t a set-it-and-forget-it kind of deal; it requires a certain level of engagement, appropriate to your available screen time and interests. If you’re too active, you risk getting caught up in market noise and making impulsive decisions. If you’re too passive, you might not catch potentially problematic developments. It’s all about finding the sweet spot that aligns with your personal circumstances and lifestyle.

Understanding your commitment level can help you choose the most suitable investments and manage them effectively. You don’t have to do it all yourself – there are plenty of resources and professionals out there to help you strike the right balance. In the end, the level of activity you choose should reflect your personal goals, lifestyle, and investing knowledge. And remember, there’s always room to adjust as you grow and learn along your investing journey.