If you’re just starting to learn about investing, you need to watch this video because I can
almost guarantee you’ll make at least one of these common investing mistakes.
Let’s jump right into it.
One of the most common investing mistakes beginners make is chasing after performance.
What this means is that you choose your investments based on how well they’ve performed recently.
For instance, you might see a stock that’s up 40% over the past three months and think,
“man, I should invest in that great company so I can get a huge return!”
But just because a stock went up 40% in three months doesn't guarantee that it’ll do it
again in the future.
In fact, the only guarantee here is that the best time to invest in that stock was three
months ago.
Another common mistake people make is setting unrealistic expectations for their investments.
Now, we’ve all heard the story of the young entrepreneur getting into the stock market
and making millions of dollars overnight, but that just isn’t realistic.
You know what else isn’t realistic?
That you’ll earn a 10% return on your investment.
That’s right, you may have heard that the stock market has historically returned an
average of 10% annually.
But you need to remember that 10% is the long-term average over decades.
But in any given year, it’s extremely unlikely for the actual return of your investments
to be 10%.
In reality, you’ll see your stocks go up and down and sideways so you need to be realistic
about your expectations and not freak out.
The third most common investing mistake is also my personal favorite, and it’s not
understanding your risk tolerance.
Now put simply, risk tolerance is your capacity to take on risk.
In other words, not everyone can stomach high risk investments that could lose half their
value in a year, and that’s okay.
By being honest with yourself about how much you are okay with seeing your investments
go down, you’ll be able to make smarter decisions about what to invest in.
People with high risk tolerance may be better suited to invest in volatile startups but
if you have low risk tolerance, you’re probably better off just investing in well-established
blue chips and government securities.
Speaking of investments going down in value, if you’re actively trading stocks, you need
to be ready to accept when your trade just isn’t working out and be able to move on
to the next trade.
New investors will often see some of their investments go down in value and instead of
selling it at a small loss, they hold onto it with the hopes that one day it will go
back to where they bought it at and they can at least break even.
But the reality is that oftentimes when an investment is losing value, it’s for a reason
and it’s better to sell at a small loss instead of holding onto it until it becomes
a big loss.
Moving on, another common investing mistake is to not understand your investment time
horizon.
There’s a huge difference in your mindset when you’re investing to take your money
out in 1 years versus 30 years.
A stock market index fund for example might be a terrible investment if you’re planning
to take your money out in one year because it can fluctuate a lot in value, but it could
be one of the best investments for you if you plan to set it and forget it for 30 years.
This is why you should have an idea in your mind for how long you are planning to invest
for.
On the topic of index funds, an index fund is simply a collection of stocks and bonds
that follow a certain market.
For example, a technology index fund will probably hold all of your favorite tech companies
like Google, Apple, and Facebook.
The beauty of these funds is that they have diversification built in.
Diversification is a way to reduce your risk by owning a variety of stocks instead of putting
all your eggs in one basket.
New investors often make the mistake of not diversifying enough and putting all their
faith in just a few companies.
The reality is that even large, reputable companies can go out of business unexpectedly
so it’s good to have a variety of stocks in your portfolio.
Alright, so I’ve saved my two most important investing mistakes for last but before I get
there, I would love it if you would take just a few seconds to hit that like button.
It would really mean a lot!
With that said, let’s talk about common investing mistake number seven, which is investing
before you are ready.
What I mean by this is that you should have all your high interest debt paid off and have
an emergency fund of at least three months before you even think about starting to invest.
Without these things, you may find yourself in a tricky situation where you have to sell
your investments at a bad time to cover an unexpected expense or a loss of income so
just play it smart and take care of those things first.
On the flip side, the most common investing mistake people make is not starting at all.
If you’re too afraid to invest and put your money to work for you, you’re going to have
to work a hundred times harder in life just to make as much as someone that invested.
Remember that when you keep your cash in a checking or savings account, the interest
you get paid is almost always less than inflation, so you’re actually losing value by keeping
your money there.
So why take a guaranteed losing situation by not investing when you can invest in your
future?
What are you waiting for?
Your future self will thank you for it!
That’s all for today.
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