Top 5 Investment Mistakes You Will Probably Make as a Beginner
1. Investing Too Much Money at the Start
Investing, like anything, is a skill. It requires patience, time, practice and knowledge. These are all skills you can learn, but ones you probably won’t have when you start out.
Which is why it is not a good idea to invest your life savings on your first go.
You should start by investing small amounts while you feel out the market and start to understand the emotions and the strategies that come with investing. Especially as a beginner, you can be unprepared for the stress and the risks associated with investing, and if you invest a huge amount, you can easily make bad choices in a state of panic, and lose everything. Work your way up through amounts that make you feel comfortable, until you feel like you know what you’re doing.
Investing is a game of patience, so take your time.
2. Not Investing With Taxes in Mind
When it comes to taxes, not all investment accounts are created equal. Taxes will make up the biggest expense of your lifetime – and if you don’t invest in the right accounts, they could also make up a big expense for your investments too. Typically when you invest, you have to pay income taxes on dividends and interest payments, and you have to pay capital gains taxes on any profits from your investments.
These tax rates can range from 20% to 40%, which is a lot of money to lose, especially if you’re saving for something like retirement. Looking into tax efficient or tax advantaged accounts, like Roth-IRA’s, can save you huge amounts of money in the long run.
Do your research into what will get you the best returns, and remember to work smarter, not harder.
3. Not Deciding How Hands on You Want To Be With Investing
One of the first things you should decide when you start investing is how much time you can give to it. If you want to be really involved in the process, and you are prepared to do a lot of research, like reading through annual reports, you might want to invest in companies that you respect and believe in. If you want a more hands off approach, you could just invest in some low cost index funds and set it to auto pilot you can still make a 7-10% annual return this way.
If you really want a hands off approach, you can hire a financial adviser – but be prepared for the high prices they charge.
4. Not Understanding the Difference Between Gambling and Speculation
The purpose of investing is to minimize risk while maximizing as much return as possible. Of course, risks are inevitable and you can never be sure of what will happen – but your decisions should still be based on facts and data. This is called speculation.
If you’re investing without doing any research, you’re basically just gambling. If you want to invest wisely and play the long game, you need to understand the rules and know what you’re doing – otherwise you might as well just be in the casino.
5. Trusting ‘Experts’ Without Checking Their Credentials
There’s no issue with trusting financial experts – fund managers, or advisors are great. However, if you start to believe every self titled ‘internet guru’ – or anyone on a forum that thinks they’re the next Warren Buffett – you’re in trouble.
No one, (even Warren Buffett) can tell you exactly how the stock market is going to behave. If it was easy to predict, we’d all be millionaires.
One of the most important parts of investing is learning to trust your own instincts. Becoming a good player in investing takes practice – something that only time can give you. The more you learn and the more practice, the less of a mystery investing will become.
Now you know how to avoid the biggest pitfalls, you can focus on making money instead of mistakes!