8 Investing Mistakes Beginners Should Avoid
If you’re a beginner to investing, make sure you read this post on 8 common investing mistakes that beginners make.
Hi, I’m Oli.
Are you considering investing, or just getting started on your investing journey? I have compiled this list of 8 investing mistakes beginners should avoid. I hope after reading this you won’t make any of these mistakes and will be better prepared for a successful investing journey.
Investing Mistakes Beginners Make
- Not Investing At All
- No Emergency Fund
- Not Having a Plan
- Hot Stock tips
- Timing The market
- FOMO Investing
- Fees
- High Yield
Not Investing At All
This may seem counterintuitive given the title of this blog post, but bare with me on this. We have been conditioned that cash is king, and we should save our money in a bank account. Currently we are lucky to get a bank account paying more than 1% interest on our savings.
The reason this is a problem is because of a thing called inflation. Inflation is the rate at which the costs of goods and services increase annually. Inflation is around 2% per year, so the money you have in your savings account is actually devaluing. As goods and services become more expensive your money then has less purchasing power.
While most people think investing is risky and I would agree there is some risk involved. I would rather take a small amount of risk and invest my money to give it the chance to increase in value. Rather than sit back and do nothing, while my money is destroyed by inflation in a savings account.
Not Having An Emergency Fund
An emergency fund is a stash of money that should contain 3-6months worth of living expenses, in the event of a financial emergency occurring.
An emergency fund is one of the first steps in these seven steps for financial freedom.
Too often you see people get drawn to the thrill of investing before having an emergency fund set up. This is a big mistake, if you end up losing your job and don’t have an emergency fund, you will likely have to sell your investments to cover your bills.
This could mean selling your investments at a loss, or having to sell your profitable investments early and face higher tax implications. Either way, being forced to sell your investments because you don’t have an emergency fund is an investing mistake beginners should avoid.
An emergency fund provides a strong financial foundation for life and everyone should have one!
Not having a plan
I am a compulsive planner, I have plans for making plans. While this might be a bit much, planning has proven time and time again to produce great results. So one of the biggest investing mistakes beginners make is not having a plan.
An investing plan or strategy is what will guide your investing decisions moving forward and help keep you accountable. Without an investing plan you may feel lost or get tempted to make rash investing decisions that could cost you a lot of money.
Having a simple plan, for example committing to invest $200 per month in a market tracking Index Fund for 30 years. Will not only reap great financial benefits, but keep you accountable in your financial decisions.
You will be more likely to ensure you always deposit $200 into your investments each month if you have a plan written down. Without this plan it would be easy to brush that money aside and use it elsewhere, or worse put that money into Bitcoin!
Hot Stock Tips
Okay, this has to be one of the biggest investing mistakes out there, and yet one of the easiest to do. All the so called professionals showing their portfolios and how they made money fast and easily. You pay them either monthly or a one off fee for their chosen “hot” stocks.
Nobody can predict the future, especially not people selling hot stock tips. They will have a disclaimer in there somewhere, that says if the stock goes down (which it probably will) they aren’t liable for your losses.
Picking individual companies to invest in is extremely difficult and takes a lot of research and time, not to mention carries some risk. 92% of professional fund managers fail to beat the market over a 15 year period. I highly doubt those 8% of managers beating the market will be selling their tips.
So don’t fall for the mistake of spending hundreds of dollars for these tips. Instead use that money to invest in an index fund that tracks the entire market performance.
Timing The Market
As I mentioned previously, nobody can predict the future, so another investing mistake beginners make is trying to time the market perfectly. This isn’t to say that you can’t take advantage of big opportunities that present themselves, such as the recent crash due to Covid-19.
When you try to continually time your entry/exit points in the market you will inevitably end up making some big mistakes which cost a lot of money.
The single greatest tool on your side when investing is time in the market. The longer you have your money invested, the more time you have for compounding growth to occur. As well as for your investments to weather any fallout from market crashes.
FOMO Investing
FOMO or Fear Of Missing Out investing is another big investing mistake beginners should avoid. This usually occurs when there is a lot of media hype around a company or industry that is driving stock prices higher.
Often there has been no change in fundamentals to cause an increase and it is purely fuelled by the hype. Investors are then worried they are missing out on something that could make them “rich”.
At some point, reality catches up and it comes crashing down, a perfect example of this was Bitcoin. It went from $1,000 in 2017 to a high of $20,000 in 2018 before crashing to $3,000. This burnt a lot of people and in some cases destroyed people’s lives.
FOMO investing is a lot like musical chairs, it’s all fun and games, until the music stops. When it does, you best hope you have a chair left, otherwise you will fall pretty hard.
Fees
I dislike paying fees, especially when investing. There is no excuse these days to be paying fees when investing. With the rise of many new brokerage accounts offering fee free investing, it makes it easy and inexpensive to invest. This is still a big investing mistake beginners often make.
A market tracking index fund or ETF is often regarded as the best investing strategy an investor can follow. However, they are not all made the same, and vary based on their fees and expense ratios.
It is really important to check the management fees when choosing which index fund or ETF you want to invest in. As a 0.5% difference in fees over a 40 year period investing $6,000 per year can equal over $100,000 difference in your total portfolio.
Ideally you shouldn’t pay more than 0.5% in fees, and there are funds out there with fees as low as 0.15%. Do yourself a favour and make sure you pay attention to the fees that are being charged, you will be much better off for it in the long term.
Chasing High Yields
Another investing mistake is chasing high dividend yield stocks. Dividends are paid out of company profits to the investors as a thank you for their investment. The key point to know here is that dividends are not guaranteed.
Once investors find out about receiving dividends it is truly game changing. The next progression for an investor, is to start looking for companies that have high dividend yields. To calculate the yield you divide the annual dividend paid by the stock price.
Solid dividend companies pay anywhere between 1-5% dividend yields, which truly is amazing when you consider savings accounts are less than 1%. High yields are generally 10%+ and are extremely tempting.
The issue is, that to have a yield that high a company stock price must have dropped significantly which will put a lot of pressure on the company. This means the company is either unlikely to keep paying the dividend at that price, or even at all. This is called a dividend yield trap. Going for high yield and not looking into fundamentals means you could have a dud investment.
Summary of Beginner Investing Mistakes
Hopefully you will feel more confident about investing after reading this and will know what mistakes to avoid. Investing is a long complex journey but can be made easier by avoiding the mistakes listed.
About the Author of Investing Mistakes Beginners Should Avoid
Hi! I’m Oli.
I founded Minted Millennials to help people get control of their finances and have their money working for them, rather than against them. It’s a perfect fit combining my passion for helping others and finance, with the end result being people achieving their financial freedom.
My goal is to help empower Millennials to take control of their finances and be confident investing, in order to build their long term wealth.
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Great tips! I manage our family finances and am always looking for solid advice. I dabbled in personal socks a little. I quickly found I don’t have the time or the stomach for it!
Helpful advice, thanks! There is a lot more to learn for making a profit from investing. Agree with you that hot stock pick is risky. But I like to pick the strong stocks as they are strong on the rising trend.
Insightful post, really enjoyed reading this! Investing is such a minefield and this really helped. Thank you!
A wonderful post ideed. I liked the part where you compared FOMO Investing to musical chairs. Very relatable!!!