5 Beginning Investor Mistakes I've Made (And You Don't Have To)
There's something I've noticed about a lot of people who write about investing: They're either very rich or they work as investment professionals. Now, I don't think that that makes them unqualified to give advice to those of us who don't have a seven (or eight!) figure net worth, but it does make it a little hard to identify with them. After all, if I had a million bucks in the bank, putting some of it in riskier investments would be a lot easier to stomach. Ditto for investing other people's money.
But here's the thing. I'm an investor, too. I'm not a professional one or a rich one. But I am richer than before I started. And I'm a smarter investor than I was when I started, too. I'm also getting more confident about investing money in the stock market. That said, I made a lot of rookie mistakes along the way. Here are five of the ones that stand out. Try to avoid them, OK? (See also: Online Brokers for Newbies)
1. Avoiding (Any and All) Risk
When you've lived as a poor college student for five years, a salary is a beautiful thing. A precious thing. A thing to be carefully guarded, saved, and lovingly spent on all the things you couldn't afford before. If it feels like you don't have enough money to risk losing a penny in the markets, I hear you. Investing — especially investing in things that could potentially lose value — can be a tough sell for anyone on a tight budget.
It was for me, so at first, I stuck to investing in things with guaranteed returns. The problem with this strategy is that guarantees come at a price. And while funneling my savings into investments that yielded two or three percent made me feel safe, what I didn't realize is that in most cases, those guaranteed returns weren't even keeping pace with inflation. I might have been amassing money, but it was technically becoming less valuable over time.
Does that mean I threw all my money into risky stocks? No! But if you actually want to grow your portfolio (and this is especially true for those who are young and just starting out) you have to add some higher-risk investments. My fear of risk stemmed mostly from a lack of education about investing risk and how to manage it. To be honest, it took me a couple of years of reading and thinking to be able to embrace it and move into investing in more stocks, but it's made a huge difference in my portfolio. (See also: Asset Allocation Basics)
2. Listening to the Guy at the Bank
For many people, their only exposure to investment advice comes from whichever associate happens to be available at the bank that day. And if you're a brand-new investor it can be really easy to feel like you have to listen to whatever the guy in the suit says. What I learned, however, is that you have to be very, very careful about who you take advice from. (See also: Investment Advice You Shouldn't Hear from Your Advisor)
I quickly learned that while many of the representatives at my bank did receive training, most were more salespeople than they were advisors. What I also noticed is that they tended to really want me to buy certain investments, like mutual funds, even though my research told me that index funds were the better bet. Unfortunately, it took me a while to get the courage and confidence to take my own advice over theirs. And that cost me money.
Does this mean you should close your ears to every piece of advice you're given? Absolutely not. What you do need to learn is that you don't need to be intimated by a business suit. In fact, if you've really been doing your investing homework, chances are the guy or girl behind the desk knows less than you do. So don't be afraid to ask questions — and even question the advice you're given. If it doesn't feel right to you, refuse it. It's your money we're talking about!
3. Fearing the Crash
I started investing a few years before the mortgage bubble popped in the U.S., sending stock markets into a tailspin. That crash scared me. In fact, it scared me so much I failed to buy a single thing during that downturn. Big mistake.
What I've since realized is that I should have been doing the opposite, because when the entire market as a whole takes a beating, that's a great time to buy a solid stock.
Think of "the market" as an ocean. When things go wrong with the economy, it's like the tide going out, and all the boats are left bobbing in shallow water, no matter how stalwart and seaworthy they are. What we often forget, however, is that those big, strong, air-tight companies will float right back up when that tide comes back in.
I'm not saying you should throw your life savings into a down market, but if you can afford to purchase a couple of great, profitable companies, that's the time to do it. Next time the financial markets crash, you can bet I'll be buying. (See also: Staying Calm in a Volatile Market)
4. Failing to Play With "The House's Money"
I recently bought a small amount of stock in a company that had declared bankruptcy. It was a small buy — the company was bankrupt after all — but because of the industry it was in, I believed it would survive. I was right: The stock climbed as the company worked its way back to solvency. I made a 40% return and, when things started to look pretty risky, I sold it. And I was happy with that ... except for the fact that my husband decided to keep his shares. And guess what? That stock kept appreciating, and appreciating and, well, it's still appreciating.
Should I have kept those shares when things looked uncertain? Maybe not. But I still could have done better by selling some of the stock to recoup my initial investment and letting the rest run. That's called "playing with the house's money." It was definitely worth considering in this situation; I just wasn't thinking. As a result, I lost out on some major gains. And trust me, I know just how major they are; every time that stock goes up, I have someone to remind me.
5. Holding a Loser
I've made a few truly bad stock picks, mostly because I had some money to invest and wasn't patient enough to wait for the right thing to come around (that's another rookie mistake right there). But where I've really gone wrong is in holding these bad apples in the hope that they'll break even again. And holding them. And holding them.
That strategy makes me feel like I'm preserving my initial investment. In reality, what's more likely to happen is that I miss out on buying other, better stocks that could be making me money right now. In other words, I'm obsessing over the money I'm supposedly losing, when I could just redirect my energy to making it back somewhere else. I guess breaking up is hard to do, but when you're sure the stock you've picked is a loser, it's time to kick it out of your portfolio and find something better.
Bonus Lesson: Learn From Your Mistakes!
Investing is hard, but what really makes the stock market seem so insurmountable for people is that they just don't understand how it works. Learning that takes, time, energy and, to be honest, a certain amount of failure. What's important is that you avoid taking on too much risk at once, and learn everything you can from your mistakes — and, I hope, from a few of mine.
What investing mistakes have you made? Please share in comments!