Making investments in the stock market is an excellent way to grow your wealth. When done properly it feels like magic! You put money in and later you take out more than you deposited. Of course, the opposite can happen and you can lose money. Here are several mistakes that increase the chances of losing money vs making it when investing. There’re also tips to avoid these mistakes so you’re set up for a successful wealth-building journey.
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Obsessively Researching the Best Stocks
Everyone wants to buy what’s going to offer the best returns. The problem is, no one knows what will do exceptionally well. Searching endlessly can delay your investments because in the search to find the perfect one, you feel overwhelmed with all the options and end up not making a choice at all.
The fix: Keep it simple and use Warren Buffett’s guidance. Invest in companies you understand and use or simply choose an index like the S&P 500 to invest in.
Buying Too Many Stocks
You’ve heard that you shouldn’t put all your eggs in one basket. However, if you have too many baskets, it’s difficult to manage everything. This also limits your opportunity for concentrated growth because your money is spread too thin.
The fix: Use index funds for your primary investments and buy a few stocks to add in for additional growth potential. I like using 80% of what I have to invest for index funds and 20% for stocks (5-10 max).
Selling When Your Stocks Go Down
People feel more pain from loss than they experience joy from gains. This pain causes people to sell out of something they’ve already determined was a good investment just because it dropped in price. Many things happen throughout the year that affect the price of a stock. The great majority of them have nothing to do with its value.
The fix: Keep the investment you’ve researched and decided on for at least a year before you reassess.
Investing Too Conservatively
The fear of losing money is really strong when you start investing. You work hard for your money, so obviously the idea of losing it sucks. This will cause people to invest too conservatively when, in reality, they have plenty of time for their money to work for them. They’ll later realize they should’ve been more aggressive.
The fix: Remember that when you’re a long way from needing the money you’re investing, you have both time and income on your side to recover from large market losses.
Investing too aggressively.
New investors tend to be at opposite ends of the risk spectrum. They don’t want to lose money but also want big returns. This leads to people taking chances too early in their investment journey. They’ll invest in something risky, lose money and stop investing altogether.
The fix: If you want to take some chances, first create an investing strategy. Then carve out a little of your overall investing budget to take a chance on. Using my guidelines, you can set 80% into index funds, 15% into a few stocks, and 5% into your speculative investments.
Not Following a Strategy
Investing whenever you feel like it with random amounts into random investments is a classic mistake. This leads to emotional investing. Letting your emotions guide you will cause you to buy when you should sell and sell when you should buy. It’ll also feel like you’re on a rollercoaster, and not the fun kind. It’s difficult to plan for your short and long-term goals when investing randomly. You may invest too much and end up selling because you need money or you may not invest enough.
The fix: Determine what your goals for investing are, i.e. retirement, a business, college or other education, a home, etc. Next, run some calculations to see how much you need to save to reach your goals. If you can’t afford to save what the calculations determine, start with what you can and work to increase that over time. Once you know how much you’ll invest every paycheck, then break that into percentages that you can plug investments into.
Having Unrealistic Expectations for Growth in the Short Term
People tend to invest excitedly, then just wait and see what happens. Usually, not much happens, especially with a small amount invested. If their account drops instead of going up, this can be extra confusing. This leaves people unsure of what to do next and often they do nothing.
The fix: Remember that investing is a long-term game. You may get lucky from time to time in the short term, but you’ll see the best returns when you’ve invested consistently over time.
If you’re like me, you’ve likely made some of these mistakes or will make them. That’s okay! Remember it’s better to get started and learn as you go than to be too afraid and never invest at all. I’m making it easier for people to overcome the overwhelm and get invested sooner!
Kim is the owner and publisher of Sass Magazine, as well as the owner of Sass Studios, a boutique graphic design studio in Frederick, MD. When not in the office, Kim can be found doing some of her favorite hobbies—reading a book, dancing, traveling, or playing with her rescued pitbull.