In my 15+ years of investing, I continue to see the same mistakes happen again and again, especially when it comes to first time investors. I made a ton of these mistakes as an investor in my 20's but now I'm a lot wiser as I enter my mid 30's (I'm 33 btw).
Investing is more about controlling your emotions than being a genius. Sure, being smart helps but if you cannot get control of your emotions and feelings then avoid buying stocks and dump your money in index funds. You will be much happier in the long run.
While there are hundreds of errors you can make as an investor, here are the 10 most common mistakes to avoid. Feel free to add any other investing blunders in the comments.
1. Not Getting Started
This is the #1 most common investing mistake you can make. Getting started as early as possible is crucial to making your investments compound in the future. Each day you lose in the markets will affect your net worth in the future because it takes time for companies to boost revenues and grow profits. Investing is a marathon, not a sprint. The longer you wait to invest, the more time you lose and you'll need to invest more money to match the same performance of someone who started earlier.
2. Investing in a business you don't understand
Before you invest in any business, study the company to understand how it makes money and what makes it a good investment. Use your specific knowledge to gain an edge in a particular industry because you understand the businesses so well. For example, if you know a lot about tech companies, then buy stock in strong businesses like Apple or Facebook. Don't invest in oil companies if you don't know anything about the oil business.
Why? Because you won't be able to tell if things are going well or not without understanding. Buy a few books on Amazon to learn more about any industry before you invest.
3. Taking investment advice from family members
This is a mistake I made recently by investing in a company called Naked Brands via a tip from a family member. The company wasn't reporting earnings yet I still managed to dump $700 into the stock. As the stock continued to go lower, I let a family member convince me to hold the stock. After losing nearly 75% of my initial investment, I finally sold off the position and the stock has gone much lower since I sold my shares.
I love my family members but realize they aren't the best people to take investment advice from. Listen to their opinions but do your own research first.
4. Investing money you cannot afford to lose
Investing only works if you let your money compound over time. Only invest money you can afford to lose because you will have some losers during your journey to financial independence. Nobody has a 100% win rate in the investment business. Nobody.
If you're taking advice from an investor who doesn't show their trades or accounts, then proceed with caution.
The easiest way to save money for investing is to pay yourself first whenever you receive a paycheck or get income. Take at least 10% of the money upfront and send it to your investment account before you pay bills. Learn to live off the remaining 90%. You will realize you don't even miss the 10% after a while. Continue to do this until your investment account builds up and you have some money to buy stocks, ETFs, etc.
Don't have a lot of money? Check out this article on the best ways to invest $100.
5. Timing the markets
The stock market is at an all-time high. Should you invest now or wait later?
If you waited until a market correction, then you missed out on the longest stock market bull run in history. My advice is don't time the markets. Continue investing in solid companies whether the market goes up or down. Now, I don't recommend buying stocks when they are overvalued but you are better off using dollar cost averaging to build up a large position over time.
If you want early retirement and financial freedom, then you'll need to own a lot of shares and lucrative dividend paying stocks. It takes time to build up a large portfolio.
Invest regularly and stick to your schedule. Maintain the habit of investing over the long run to grow your wealth substantially.
6. Investing with scared money
Stocks markets are volatile and it's not unusual to experience huge gains and losses within a short time period. If you are scared of investing then stock to low cost index funds. You can earn around 10% annually buying a Fidelity or Vanguard total stock market index fund.
Investing with scared money leads to poor emotional decision making and could destroy your investment portfolio. Always think long term (5 to 10 years in advance) and trust your research.
7. Thinking short term
Warren Buffett once said: “The stock market is a voting machine over the short term. It's a weighing machine over the long term.”
We cannot predict the stock prices over the short term because investors are emotionally influenced by things like job numbers, earnings, news articles, and lots of other noise.
However, in the long run, if a company produces strong revenue and profits, the stock price will rise to reflect the performance of the underlying business.
Thinking long term puts you at ease when your stock isn't doing well in the short term. Use long term strategies to stay on track and stick to your investing plan.
8. Catching a falling knife
Catching a falling knife is a metaphor used in the investment world to describe buying a stock that keeps going down. In real life, you never catch a falling knife because you get cut.
The same is true for investing. If a stock or investment continues to fall in price then be patient and figure out why the drop is occuring. Only consider investing when the price stablizies and you think the investment is trading at far below true market value.
9. Not Being Consistent
Successful investors don't invest 1 time then do nothing. Now, you may hear about stories about investors who bought Coca Cola stock a long time ago and turned $1,000 into millions. Stories like this happen but they are the exception, not the norm.
For best results, set up an investment schedule and stay consistent over the long term. I use automated deposits to transfer money from my checking account to my investment accounts every week. I'm increasing my investments on autopilot so I don't have to remember to invest all the time.
Create a weekly or monthly schedule and keep buying stock on a regular basis. Over time, your account will grow and you will be surprised just how far you've come.
In the short run, your regular investments seem insignificant.
Over the long run, your future self will thank you.
10. Giving Up too soon
It takes years for your investments to bear fruit. Heck, it takes 18 years for a human to reach maturity.
Great companies need time to grow their revenues and profits. Don't give up and keep investing.
Add investing to your lifestyle and never give up. Read books, quarterly/annual reports, watch Youtube videos, and continue improving your financial education. Your hard work guarantees a better future for yourself and your family.