5 Mistakes to Avoid as a New Investor

February 4, 2022
Treyton DeVore

For new investors, getting into the stock market can be scary.

It feels like there are unlimited investments to choose from and trying to evaluate an investment can feel like reading a calculus textbook.

Also, not to mention the fact that not all investments are going to make money.

However, investing is one of the best things you can do with your money.

One of the best ways to learn about a new topic or area of interest is by taking action, making mistakes, and learning as you go. But when it comes to your money, making mistakes probably isn't something you want to do repeatedly.

Simple mistakes can cost thousands of dollars over time so by avoiding a few of these, you'll be well on your way to becoming a successful, confident investor:

1) Killing compound interest

One of the biggest mistakes I see made by new investors is stopping compound interest and not letting it do its thing.

When you sell investments, you're stopping their growth.

If you're investing for the long term, you want to experience as much of that growth as possible.

This is why I believe it's important to have an emergency fund established before making investments. By having a 3-6 month emergency fund saved up, you can cover the cost of an unexpected expense without selling any investments.

But if you didn't have one and invested all of your money instead, any time you have an unexpected expense you'd have to sell off some investments, you may have to pay taxes on that sale, and then you're basically back at square one.

So if you're just getting started investing, build up a small emergency fund first to avoid having to sell off investments in case of an emergency, and then try to let the money stay invested and grow in the stock market for as long as possible.

(Yes, you may want to sell some investments over time for different reasons, but that's a different topic for another week)

2) Following random advice on social media

I was going to label this one as 'following the latest trend' but in recent times, following trends has actually been a decent investing strategy. We've seen a slight shift away from traditional investment philosophies to the now-popular "meme investing".

However, regardless of whether you're a meme investor or not, following random advice online without fact-checking prior to make an investment is a detrimental mistake that happens way too often.

If you see investing advice online or someone telling you that you need to buy something, always do your own research and evaluate an investment to determine if it makes sense for you and your situation.

3) Investing in things you don't understand

Similar to the last point, you should always understand what you're putting your money into prior to doing so.

With how popular crypto and NFTs have become in the last year, I've seen countless people throw money into investments that I know they don't understand because they've told me they didn't. They had seen something on TikTok or Twitter about an investment and just followed the advice and bought.

This could play out okay, or they could lose all their money. Nobody knows.

But if you understand something before you invest in it, you have your reason and your purpose behind making an investment. If it doesn't play out how you thought it would, that's okay. That's life. Not every investment is going to make money.

But the point is that you would have done research, understood what the investment was, and made a logical choice to invest in it rather than putting your money on the line based off of a random piece of advice you saw online without doing research.

4) Comparing returns to other investors

In the age of social media, comparing ourselves to others is harmful in many different aspects.

And when it comes to your investments, it's easy to get discouraged if you see people on Twitter posting about 100x returns on crypto or an NFT they bought.

Those kinds of investments aren't for everyone and the chances of making an investment with crazy high returns is fairly small.

With this, one crucial piece of the investment equation that investors who boast 100%+ returns usually fail to mention is the amount of risk they took on to do so.

Trying to beat the market and get high returns comes with a considerable amount of risk and by comparing your investments to others, you may not always be making a truly accurate comparison.

If your investments returned 20% but were low risk, you're probably going to be happier and sleep better at night than someone who earned 100% returns but had a 50/50 chance they were going to lose it all.

And one way this mistake can be partially avoided by defining your goals.

5) Not defining your goals

Prior to making an investment, it's crucial that you define your goals because doing this will help you build a strategy and plan behind your investments.

For example, let's say that you wanted to invest because you're saving for retirement. If you're 25 years old and don't plan to retire until you're 50, you have 25 years to invest in the stock market.

Knowing this, you can begin to determine what amount of money you need to have saved when you're retired. Let's say that it's $2 million.

If you're making consistent investments and you're on track to hit that $2 million goal with 10% investment returns, it shouldn't matter if someone else is making a lot more because their situation and goals are different than yours.

Also, defining your goals will help determine how and what you invest your money in.

For example if you were investing with a 5 year timeframe rather than 25 years and that money was going to be used for a down payment on a home, you would most likely want to invest in lower risk investments so the money can grow a little bit but at the same time, have less chance of going down.

But overall, defining your goals for the investments you make is a necessity. No matter what the goal, it needs to be established so you know the purpose of the investment and can take the appropriate actions.

A classic saying in the financial advice world is that "investing should be boring". And I generally agree with this.

Most people don't want to think about their investments all the time and just want the money to grow over time. With this more passive approach, you can generally invest in simple ETFs, mutual funds, or target date funds, set up automated deposits, set it and forget it, and be just fine.

There are many different approaches to investing and there's no "right" way to do it, but as long as you always put your own situation and your own goals first, you'll have a better chance of coming out on top and being a successful investor.

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