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Investing is one of the best (and fastest) ways to make your money grow. There’s no better way to earn money without working for it or a faster way to reach your goals. But you have to know what you’re doing. While you should invest as early as you can in life, there are certain mistakes you should avoid so that you reach your financial goals.
Not Understanding what you Invest In
Investing in what you don’t understand is the biggest mistake you can make. If you’re new to investing, work with someone (or a robo-advisor) that will help you understand your investment options so you can choose wisely.
Investing just because your best friend or neighbor is investing in something isn’t a good strategy. You don’t know their plan, goals, or risk tolerance. It may or may not be similar to yours. If it’s not, you may invest in assets that won’t help you reach your goals and may even hurt your goals.
A big part of investing isn’t necessarily the individual stocks or bonds you choose, but your overall allocation. If you’re investing for the long-term, you have a higher risk tolerance and can invest more aggressively. If you have a shorter timeline, though, you may need a higher mix of conservative investments with your aggressive options to offset the risks.
Letting Your Emotions Drive Your Decisions
How many times have you heard of people bailing out of the stock market when it crashes? What if that was the worst thing you could do?
Most of the time (not always), you should stick it out. Oftentimes when the market crashes is the best time to get into it. You can buy investments at rock bottom prices and then ride the wave as they go back to their ‘normal’ value.
If you jump out when the market is at an all-time low, you won’t be there to earn the rewards when things go back to normal. On average, the market does a full circle within 7 years, giving investors an average 10 percent return on their investments. The key is sticking it out long-term, which means avoiding making emotional decisions.
Trying to Beat the Market
Less than 1 in 6 expert investors beat the market. These are expert professionals with years of training and who watch the market nonstop.
New investors and even those with a decent amount of experience don’t stand a chance of beating the market. In fact, you only hurt yourself when that’s your goal. Instead, try mimicking the market’s returns. The S&P 500 for example, has an average annual return of 9 – 10%. Why try beating that when that’s a decent return in itself?
When you try to beat the market, you make rash and unreasonable decisions that affect your portfolio negatively most of the time. Instead, look for average returns and adjust your goals accordingly.
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Forgetting to Diversify
I’m sure you’ve heard the term ‘don’t put all your eggs in one basket.’ This is especially true with stocks and bonds.
If you put all your money into one investment, what happens when that investment fails? You lose everything.
Now, what if you had ‘some’ of your money in that investment and money in other investments too? If that one investment does poorly, it won’t affect you as much. Yes, you’ll lose money, but the money you have invested in other assets will offset it.
There’s more to it, though.
When you diversify, make sure you choose a variety of asset types. For example, don’t invest everything in stocks or everything in bonds. If the stock or bond market tanks, you lose everything. That defeats the purpose of diversifying.
Instead, diversify with different asset types and within each asset category. In other words, your portfolio should have a good mix of stocks and bonds, but within each category, you should invest in different industries.
For example, don’t invest all your stock money in technology stocks or healthcare stocks. Instead, invest in a variety of stocks so if one industry tanks, the others may offset the losses. The same is true of bonds and mutual funds.
Divvy up your investments as much as possible to ensure you get the most out of your investments.
Not Planning your Investment Strategy
Finally, no one can invest without a strategy. Your strategy should include some or all of the following:
- How much will you invest to start?
- How much will you contribute each month?
- Where will you invest? Will you use a human advisor, robo-advisor, or do it yourself?
- What are your goals? Set short-term, mid-term, and long-term goals.
- What is your timeline? Are you looking at a six-month, one year, 10 year, or much longer timeline?
- What’s your risk tolerance? In other words, how much can you stand to lose and still be okay?
- How will you reallocate your portfolio when it gets off course?
- What is your tax strategy?
Answering these questions and any others that pertain to your investment strategy are important before you invest for the first time and to revisit periodically when you’re investing.
Avoiding the Most Common Investing Mistakes is Important
As you start your venture into investing, make sure you avoid the mistakes above. Not only will they cause you to lose money, but they make it hard to think about jumping back into investment opportunities.
With the right steps and potential help from a robo-advisor or human advisor, you can make the most of your opportunities to make your money work for you.
Whether you’re saving to buy a house, go back to college, buy a car, or for retirement, there are investments and portfolios ready to help you achieve your goals.