Wise Bread Picks
We all make mistakes.
Looking back on my years of investing, I notice some small and some big mistakes I’ve made along the way. As I’ve talked to other people, I’ve found that others have made the same mistakes. In order to help you learn, I’ve complied this list of the top investing mistakes. (See also: Investing With Your Values)
1. Starting to Invest Too Soon
Conventional wisdom says invest now, but there are reasons not to invest now.
Many new investors hear a story about some gal tripling her profit in three months and rush home to tell their spouses they need to start investing. Within a couple of days they own stock, but they don’t know a lick about stocks or the stock market.
There is a right time to start investing.
Start investing when your finances are in order. For example, you might consider paying off credit card debt before you start investing.
Start investing when you’ve learned how to start investing. Don’t invest in anything until you have at least a basic understanding of how that investment benefits you.
2. Paying Too Much to Buy and Sell
There’s a great place to buy and sell stock, mutual funds, and index funds. You’ve probably heard of it — it’s called the Internet. Buying and selling online is so simple, and it is a competitive market. That means you can save some serious money by choosing an online discount stock broker.
3. Focusing Too Much on Fund Fees
You might think that #2 and #3 contradict each other, but we’re talking about fund fees, not trading fees. Sure, fund fees are important. If you can get the exact same product for .5% fee instead of 1% fee, then that is a good choice.
However, you might have one mutual fund that charges 2.5% management fee and one that charges a 1% fee. So which is better?
If the one fund has an average annual return of 10% and the other 15%, then the 15% fund is better no matter the fees you pay to own that fund. Returns are more important than fees.
4. Discovering Your Risk Tolerance at the Wrong Time
Everyone has a high tolerance for risk when the market is going up. Hey, I’ll take a risk to gain an extra 10% this year. But then when the market turns, you find out that you just lost an extra 10% because of the risk you took.
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It is often in the middle of a bear market that people decide to sell. They sell because their losses are greater than they anticipated.
5. Changing Your Investing Strategy Based on Market Conditions
Let’s say a person was going to invest $100 every month for the year. However, after a couple of months that person sees that he has a loss, so he decides to stop buying until the market goes back up. It seems like that would make sense, but it is a very bad move. It means you actually pay more because you waited for the price to go up.
In fact, that is one of the strengths of dollar cost average and value averaging — they can be effective in good and bad market conditions.
Yes, you may need to re-evaluate your strategy based on market conditions, but don’t let your investing approach change with every ebb and flow in the market.
6. Looking for Hot Stock Tips
If you listen to any talking head who knows which stock will skyrocket next month, you should run for your life.
Investing hot tips are for movies. In real life, people realize no one can predict what’s going to happen next. Don’t believe me? Ask 100 investing professionals if the market will be up or down this year, and I doubt you’ll find more than 10 people who have the same prediction for the same reasons.
7. Paying Outrageous Fees for Investing Advice
Several years ago I fired my financial advisor. The reason was that he would only advise I buy mutual funds that had a 5% front-end load. That’s how he made his money. That’s how I wasted money.
Too many of us think professional financial advisors have some hidden knowledge. They don’t. Getting financial advice is good, but just don’t pay outrageous amounts of money for it.
What other common investing mistakes have you encountered? Have you made any of these investing mistakes?
