What are Common Mistakes made by Beginner Investors?
The biggest mistake new investors make is not managing the risk of their investments. The stock market is a money machine and not a slot machine. Watching for these common mistakes can improve your risk management and build wealth.
10 common mistakes made by Beginner investors
Having unclear investing goals
How do you drive to a new destination without a map? When you do not have a solid investment goal, you make investment guesses. Instead, make investment decisions. Your investment goals should consider:
- time horizon
- risk tolerance
- financial needs (growth, wealth preservation, or income)
- monthly investing goal
Being too Safe or Risky
Portfolios suffer when you make bets instead of investments. You should manage risky investments by diversifying your risk and doing your research.
On the flip side, if you invest too safely, you risk losing purchasing power due to inflation. It is important to build your investment goals so that you can make an investment plan that doesn't fall into these extremes.
When non-diversified, your investment future gets tied to every risk placed upon a few assets.
The classic example is gold. When you are 100% in gold, you hope everyday that no one finds a new gigantic gold mine that will eliminate the scarcity of gold. Check out this chart from goldprice.org.
Now you may think this is preposterous... but look what happened to the price of gold since "digital gold" was introduced in 2013. Gold was stymied for years when Bitcoin was introduced and is now just recently recovering to 2013 price levels.
Diversification is important to your financial health. Check out these tools from StockBossUp that help build diversity into your portfolio.
Constantly watching the markets
Green is not buy and red is not sell! For new investors, the best thing you can do is "set it and forget it". Do not let your emotions take over... that literally is what a lot of market participants want you to do.
Day traders and algorithmic traders make money off of the "emotional movements" of the market. When investors feels the same panic, hope, or fear, they all act in the same, predictable patterns. These patterns are preyed upon by traders.
These traders cannot make money off of long term investors. Long term investors know they need to take their emotions out of their decisions. Hence, a long term investor's actions in the market cannot be predicted by day traders.
Following bad advice from social media
The goal of social media is to keep you engaged and scrolling.
Social media don't care about your portfolio
For every piece of advice you get on social media, be sure to do your own research. What you are seeing on your feed is what is going to get you to click like, not improve your wealth.
The StockBossUp app is changing this paradigm. StockBossUp trends by performance instead of engagement so that members can grow their wealth with the ideas they find. Check out how StockBossUp allows members to draft other members and build winning portfolios from their social feed.
Chasing the trends
"The trend is your friend".
That is great for advanced traders, but for beginner investors the trend is your potential nightmare. Unfortunately, it is typically the beginner investors that are the last investors buying into a trend.
Do your research before investing. Bitcoin, Amazon, and Netflix were not trending investments when they were first introduced.
Confusing luck and skill
Every investor has thought that they were great only to discover they got lucky with their investments. The worst thing that can happen to a new investor is success as it gives you a false belief that success will continue.
All investors have a losing stock, even the best ones. Investing is about triumphing over misfortunes and winning more that you lose. Investing comes down to knowledge and execution.
Not giving your investments time to grow
To be successful as a long term investor, you should hold your investments for at least 2 years. If the company you purchased is healthy, then they should be reaching new all time highs in two years. Random events effect companies quarter by quarter, but well managed companies will adapt and show growth in two years.
To be a day trader, you must be dedicating at least 6 hours a day to trading. For most beginner investors, this is not practical. However, long term investments can be researched when the markets are closed. Once you have chosen your stocks, you should not be watching them often. Research long term investments on the weekend, after work or before class. Investment trades can be set the night before the market opens using limit trades.
Delaying investing altogether
Because of fractional shares anyone can invest. You should be investing right now without delay.
If you are not sure which stocks to start with, draft a team using the StockBossUp app to get 10 stock suggestions.
Forgetting about taxes
When you sell a stock for a profit, be prepared to pay 15% of that gain to the IRS. If you sell your stock within less than a year of buying the stock, then you're gains are taxed as ordinary income. This will vary based on your total income, but this could be up to 28% of the gains you made!
The Take Away
For beginner investors, be sure to manage your risk and start investing now. Anyone can be a successful investor
Part of a Series for Beginner Investors