New investors have access to more information than ever before to help them get started, but beginners often make simple mistakes that prevent them from attaining their investment goals.
While it takes time to grow more comfortable with investing, fixing these common errors will immediately make you a more effective investor.
1. Using the First Broker You Find
When you’re new to investing, it can be overwhelming to compare different brokerage options. Some beginning investors commit to the first broker they find and assume they’re getting the same service they would find anywhere else.
While you can be successful on any investing platform, the service you use has a real impact on your experience. Don’t assume that the application your friend told you about is necessarily the best one for your unique financial situation. Different platforms offer unique benefits like free investing, mobile apps, and clear visualization of your results.
Solution: Look into Different Options
Before committing to a specific investing service, check out some of the most popular options and compare their features and costs to determine which one is right for you. With so many online brokerages available, there’s no reason to limit yourself to just one or two choices.
Some investing platforms offer sign-up bonuses like free stocks for first-time users, but it’s more important to find something you’ll be comfortable with over a longer period of time. These perks are small benefits compared to how much you could make on your investments. Many of these services are completely free, so you can try them out without committing or taking on any risk.
If you use a platform that charges commissions, you’ll need to keep those costs in mind when making investment decisions. Even seemingly minor fees can significantly cut into your gains, especially if you’re an active trader. With that in mind, it might be better to start investing with a free service.
2. Putting Too Much Money in a Few Stocks
Since investing can be so overwhelming at first, many beginning investors start by buying shares in a small number of businesses. While this is sometimes a viable strategy for experienced traders, it’s usually not the best approach for new investors who aren’t as familiar with the intricacies of investing in a single area.
Having a large portion (more than about 5 percent) of your money in a single stock increases your risk level and ties your success to that business. Similarly, investing heavily in just one or two industries will make your portfolio dependent on unpredictable trends and developments in those fields.
Diversifying is almost always the better decision, especially if you’re just starting to get on your feet as an investor. This applies to individual stocks as well as sectors—spreading your money out minimizes risk while helping you achieve sustainable results.
We all have a friend who made a fortune on a lottery ticket investment like Bitcoin or Apple, but there are many more people who lost money after putting too much in a business that didn’t make it. People who diversify see more predictable results and aren’t subject to the same variance as those who invest in a smaller number of stocks.
3. Chasing Short-Term Gains
Just as new investors often want to find the next big thing, people with less experience often pursue immediate growth. Aiming for a higher reward almost always comes with higher risk, so it’s easy to lose money quickly with this strategy.
Similarly, new investors who lose money are more likely to try to make up for the loss quickly by taking on high-risk investments. Even successful investments often take time to mature, and trying to rush the process is one of the most common errors among inexperienced investors.
Solution: Invest More Thoughtfully
New investors make a number of mistakes when attempting to achieve quick growth or make up for major losses.
If a stock price drops below what you paid for it, for example, you might be tempted to sell it immediately and get back what you can before it decreases even more. New investors tend to let their emotions affect their approach, while more experienced ones have the patience to wait out temporary losses.
Rather than checking your account every day and worrying about minor fluctuations, give your portfolio time to grow and try to think on a larger scale. This will help you avoid making reactionary decisions and putting short-term desires over long-term needs.
4. Waiting Too Long to Get Started
Many of us think of investing as only an option for those who already have a lot of money. While investing higher amounts does give you more opportunities to grow your portfolio, that doesn’t mean you should wait before investing. The sooner you begin to make contributions, the sooner you’ll begin earning money on your investments.
Even if you’re current in debt or otherwise dealing with financial difficulties, investing could still be the right decision. Start putting whatever you can toward an investment account as soon as possible, then continue making contributions after you notice returns.
Solution: Prioritize Investing
Some new investors contribute whatever they have left at the end of the month, but this isn’t always the best approach. Instead, make investing your top financial priority and put money in your account as soon as you receive your paycheck.
Once you start budgeting for investment contributions, it will only get easier to save that money each month. The most important thing is to stop viewing your investments as a secondary expense.
Fortunately, there are a number of online services and mobile apps that enable you to set up automatic contributions. Your employer might even allow you to automatically put some of each paycheck into an investment account. These options remove the temptation to spend the money you need to save, and many apps come at little to no cost.
5. Trying to Time Investments
When you’re new to investing, it’s easy to believe that you can outthink the competition and buy the right stocks before they increase in value. While you might get lucky and buy shares at the perfect time, the reality is that nobody can time the market, at least not over long periods of time.
With so many experts monitoring the real-time value of each stock, it’s unlikely that you’ll be able to consistently beat the rest of the market. Market timing is a beginner’s strategy that investors generally move away from as they gain more experience.
Solution: Stay the Course
Any given stock might dramatically increase or decrease in value, but these trends tend to balance out over time. Compared to investment timing, your general tactics have a much greater impact on your long-term results.
If you trust your approach to investment, you’ll feel confident enough to wait out short-term losses and avoid selling too early on shares that go up. The most effective investors understand that real growth happens over months and years, not days and weeks.
Getting into investing for the first time can be overwhelming, and it’s easy to make simple mistakes that more experienced investors would avoid. Keep these common errors in mind to generate better returns and grow more comfortable with the challenges of investing.
6. Not Taking Advantage of Free Money
Investing returns of 7% or 10% a year are great, but did you consider that free money provides an infinite rate of return? And getting free money to invest may be easier than you think.
What am I talking about? Employer matches on a 401(k) plan. Many companies offer to match a certain percentage of their employees’ contributions to its 401(k) plan, up to a certain percentage of each respective employee’s salary.
This could mean thousands of dollars of free money from your employer every year!
Unfortunately, Americans are missing out on $24 billion in unclaimed 401(k) company matches each year. Don’t let that be you!
Solution: Talk to Your Company’s HR Department
I get it. You’re not even sure if your company has a 401(k), or if they match, or if you’re eligible.
Getting answers to those questions is exactly what your company’s human resources department is there for.
If you’re not sure if you’re leaving money on the table due to unclaimed 401(k) employer matches, I urge you to get on the phone with your human resources department as soon as possible to find out.
And won’t worry! You won’t sound silly asking these questions. Human resources people get asked about retirement plan options all the time!