9 Costly Investing Mistakes That Make You Look Like A Rookie Investor!
Avoid these common investing mistakes to maximize your returns.
This post was first published on NewVestor.com on February 14, 2020.
Legendary investor Warren Buffet has two simple investing money rules. Rule №1: Never lose money. Rule №2: Never forget rule №1. Investors break these rules all the time with constant investing mistakes. We have compiled a list of 9 investing pitfalls that you should avoid to achieve maximum portfolio returns.
1. You expect to get rich overnight.
Investing saved money in the stock market is arguably the single most effective money decision that will make you become wealthy. But investing will not make you rich overnight. Unfortunately, many people have unrealistic expectations about investing money. Such expectations can lead to disappointment, and cause them to abandon investing altogether. Investing is a slow, steady and consistent process that will help you build sustainable wealth.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
Paul Samuelson
2. You’re chasing yields.
Chasing yields is a common investing mistake that investors make, especially novice ones. This is a practice where an investor selects a stock or mutual fund solely based on historical performances. The investor selects the security with the highest past yields. Sadly, this investing mistake can be a hindrance to your portfolio’s returns. Always keep in mind that “past performance does not guarantee future results”. If you are struggling to choose securities for your portfolio, check out how to evaluate and select mutual funds.
3. You try to time the markets.
Don’t be a fool; don’t try to time the stock market. No one can. Trying to predict the right time to enter or exit the stock market or the best time to buy or sell securities can lead to costly and emotional investing decisions. It’s a game you cannot win. There are too many unpredictable forces or events that can bring wild swings to stock market indices at any given moment. Timing the markets won’t make you rich; time in the markets will. The best thing you can do is to invest consistently and let your money grow and stay invested over the long term for maximum rewards.
“The individual investor should act consistently as an investor and not as a speculator.”
Ben Graham (American investor)
4. You buy the “hot” new stock just because everybody else is buying it.
Jumping on the latest hot stock’s bandwagon because everybody else is buying it is one of the dumbest investing decisions you can make. Sure, the odds may be in your favor and you may win big. But if the only reason you invest in a stock is for the fear of missing out on the latest gains, you will set yourself up for investing failure when the bubble bursts. You must always take a close look at a company’s entire bottom line or fundamentals (e.g. debt, earnings, among other things) before becoming a shareholder. According to Warren Buffet, “Never invest in a business you cannot understand.”
5. You constantly invest in funds with high expense ratios.
As an investor, your investing goal should be twofold: minimize cost and maximize returns. Investing in mutual funds with high expense ratios will put a dent in your investment returns over time. Passively-managed mutual funds carry lower expense ratios, compared to their actively-managed counterparts. There are times when paying the extra fees for active management may make sense. But if your active funds continue to underperform their passively-managed equivalent funds, you must dump those active funds.
6. You fail to diversify your investments.
Diversification is an investing strategy of allocating money to different asset classes or sectors to minimize financial risk. For example, if you invest your money in only one asset class or sector and that sector suffers a financial downturn, your portfolio could pay a big financial price. Conversely, if you spread your money across different asset classes, and one sector falters, the other assets in your portfolio may protect your investments from steep stock market losses.
[Related: 4 major asset classes every investor should know about]
7. You over-diversify your investments.
If you are not careful, diversification can lead to over-diversification. Over-diversification, a common mistake that young investors often make, is the process of investing in multiple asset classes or funds from the same category or sector. For example, having two large-cap mutual funds or exchange-traded funds with similar composition in your portfolio is over-diversification. This may expose you to more risk and even diminish your returns. To prevent portfolio over-diversification: 1) keep things simple; 2) know the category or asset classes that comprise your portfolio’s funds; 3) be mindful of what you invest in.
8. You borrow or withdraw money from your IRA or 401k.
Unless you absolutely must, don’t borrow or withdraw money from your retirement accounts! Life is unpredictable. You can never predict when the next financial emergency will strike. You may be tempted to withdraw or borrow money from your retirement account during financial crises, but if you can avoid it or resist the urge, you set yourself up for maximum financial rewards. The longer your money stays invested, the greater the financial returns. Consider setting up an emergency fund to avoid tapping prematurely into your 401k or IRA.
9. You hire a robo-advisor.
Robo-advisors are digital platforms that use computer algorithms to automate investing. The idea is to essentially eliminate or minimize human intervention. Such platforms enable people to invest with the use of a simple app. After entering a set of information during account setup (age, salary range, risk tolerance, and investment goals, among other things), the robo-advisor will provide you with an investment portfolio. Oftentimes, that portfolio is composed of a few low-cost exchange-traded funds. A few well-known robo advisors include Acorns, Wealthfront, Wealthsimple, Betterment, etc. If you are new to investing, robo-advisors may make sense for you. But if you already have a handle on investing and want to avoid paying management fees, you shouldn’t hire a robo-advisor.
[Related: 4 Reasons why you should fire your robo-advisor and manage your own investments.]
The bottom line
Investing is arguably the single best way to build wealth. You don’t need to be an expert or have a lot of money to start investing. Every investor, expert or novice, makes mistakes. Making the same investing mistakes over and over again will surely diminish your returns. What are some investing mistakes that you avoid at all cost? Please share them with us in the comment section.
Here are a few other articles you may find useful: 3 large-cap growth index funds for your investment account | How to invest your tax refund | 5 smart investing money moves to make in 2020 | Cash is trash, not king; invest it | How to invest $1000.
