Common Investing Mistakes and How to Overcome Them
I don’t know about you, but I hate to make mistakes – especially when it comes to my money. My wife and I work hard to bring in the income we do and when I see that a mistake has been made I see it as money we threw out the window with no opportunity to get it back. What I do like about making mistakes though is the learning opportunity that they provide so we can avoid future mishaps. I love to learn and these are perfect opportunities to see how I can improve my approach. One area that I focus very heavily on in relation to learning opportunities is investing in the stock market. I’ve had the opportunity to see people make terrible mistakes with their portfolios and either continue down that path, or use them as a way to grow. What this has allowed me to see is that we’re all human (surprise, surprise) but that it’s those who turn their investing mistakes on their heads who end up ahead of the rest.
Waiting too late to Invest
One of the most common investing mistakes is waiting too late to invest in the stock market. There can be a number of reasons why, from the feeling that they can’t afford to invest or being saddled with debt of various forms. I too was in that situation as I handled credit cards like they were free money and ran up credit card debt. While I was repaying that debt I failed by not investing anything in the stock market. I know the issue of doing both is open to debate, but the point is that I gave up nearly four years of growth of what little money I did have. If you’re waiting to invest now, don’t allow the amount you have hold you back. Even if it’s in small amounts, build up a small cushion of several hundred to a thousand dollars and put that into the stock market. Not only will that put time on your side, but it’ll also allow you to develop an investing discipline that will serve you well for years to come.
Not Being Properly Diversified
We’ve all heard the axiom of being properly diversified in the stock market. I think we hear this so often that we become almost numb to it. Many investors hear this though and think that because they’re invested in a couple of stocks that they’re diversified enough. The sad truth, generally speaking, is that is not being diversified at all. What happens if the handful of stocks is in the same sector or business and a world event impacts that sector? You guessed it, your portfolio has lost 30% in the blink of an eye. I know that diversification is not the most sexy or exciting investing topic, but it works. What do you do though if you don’t have the time to find enough investments to be properly diversified? That is actually a generally simple problem to solve. The way you solve that is by investing in some solid index funds that track the major stock indices. Just be careful though, because there are some wild indices out there that are relatively unproven. Look for ones that track major stock indices, which allow you to follow what the market as a whole is doing and you’ll be off to a great start.
Not Educating Yourself
There is no doubt that investing in the stock market can be intimidating. Money is an emotional issue and putting it into the stock market can be very emotional as so much of what the market does is out of your control. How can this intimidation be mitigated? Through education. I know that many either do not know where to start when it comes to investing education or lack the time to do it. As someone who has been in the investment industry for a number of years, let me tell you that there are many resources available and many of them for free. There are various reputable websites online that provide a wealth of education and information – such as Yahoo Finance or Morningstar. If the big corporate sites aren’t your thing, then there are a wide variety of blogs, such as Adam’s, that offer great first person education and information. The beauty with investing education is that a little can take you a long way and once you get a little under your belt, you’ll be, generally speaking, more comfortable with investing in the stock market.
Following the Herd
It’s a common feeling when we see others running for the hills that we want to as well. It’s human nature to join in and do what others are doing. On one level that is fine, but when done en masse, with regards to investing, it can be ruinous for your investment portfolio. Again, money is emotional and when we see losses causing people to pull out of the stock market there’s something inside of us that wants to follow suit. There is a small problem with that though – most, if not all, of those people have no idea what your investing goals are. They may be only a few years from retirement and thus much more conservative while you may just be starting investing for retirement and thus much more willing to stay in the market. An easy way to mitigate the issue of following the herd mentality is by determining what your investing goals are, creating a plan around that and keeping your eyes on that prize. You’ll need to adjust over time, of course, but that will serve you much better than by following what the rest of the crowd is doing.
What investing mistakes have you made and how did you correct them?
John is the founder of Frugal Rules, a finance blog that regularly discusses investing, budgeting, and frugal living. John is a father, husband, and veteran of the financial services industry who’s passionate about helping people find freedom through frugality. Visit him at frugalrules.com or follow him on Twitter.