Personal Finance

5 Mistakes Beginner Investors Make

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If you are just starting your investing career, you might be anxious about making mistakes. Don’t feel bad about that.  It’s wise to be anxious if you are new to finance.

The good news is that there are really only 5 major mistakes that newbies make and it’s very easy to avoid those errors — if you are aware of them.  Let’s go through these issues one by one:

1. Wait too long

The most obvious mistake you can make is to wait too long to invest your money.  With the creation of mutual funds and exchange-traded funds with low or no commissions, you don’t need a lot of money to get started — $100 is plenty to get your feet wet with. You can even use an online service like Betterment to learn as you invest.  Don’t feel like you need a small fortune in order to get off the ground.

2. Start too soon

While I often see people wait too long, I also see people who start investing when they should be taking care of other responsibilities first.  For example, if you have credit card debt, you have no business investing until you pay off that debt.  Here’s why: If you owe money to a credit card company you might be paying between 8% to 18% interest.  If you pay that debt off, it’s like you are earning that much on your money.  So paying off an 18% credit card is like earning 18% on your money guaranteed.

Why is that better than investing?  Well, while you might earn 18% with investments, you also might not.  In fact, you might lose on your investments in any particular year.  You can see that paying off the credit card is a far better investment because the “return” is guaranteed while the stock market has risk.

Let’s consider another example when it makes sense to put off investing.  Assume you need inexpensive term life insurance but don’t own any.  You have a choice between staring to build an investment portfolio and buying enough life insurance.  What should you do?  The answer is easy.  You should get the right amount of life insurance in place first.

Getting out of debt and buying term life insurance (if you need it) are the foundation of your financial future. You must address these two concerns before you invest.

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Free Credit Check & Monitoring3. Get too much education

You don’t need a Ph.D. in investments before getting started. True, there is an endless supply of financial advisors, authors and radio talk show personalities who are only too happy to guide you.  But if you study all of these sources you’re going to find conflicting advice.  That often leads to “paralysis by analysis.” Remember, you don’t need to learn how to become a financial advisor.  You just want to learn about investing and then start doing it. Don’t get caught in the trap of being a full-time student on investing.

Your goal is to get helpful information that you can take action on.  Here’s how to do that: Make a list of the 5 most successful investors you know and interview them.  Ask them for advice on how to get educated quickly in the world of investments.  If someone suggests you pursue making super risky investments or short-term speculative plays, thank them and move on to the next person.

After you speak with a person who provides realistic counsel on how to learn about investing for long-term results, follow their advice.  They’ll likely suggest one or two good books.  That’s probably all you’ll need.

[Related Article: Five Freedoms Debt Denies You]

4. Invest without fully understanding the risks

Sometimes people get super excited about investing and they don’t “waste time” making sure they properly understand the risks and/or the way the investments work.  The good news is that there are plenty of free resources to tap into.

The best way to really understand an investment is to look for the problems.  This enables you to become familiar with the downsides and it will help you decide if the investment is a good fit for you or not.

The people who want to sell you investments often don’t spend time explaining the problems and risks but there really is no free lunch.  There is risk in anything you do with your money.  Make sure you understand those risks by getting clear and balanced insight.  Do a Google search for “problems with……” and “complaints about …..” to learn about the downsides of what you are considering doing.

5. Take an unrealistic approach

The biggest mistake beginner investors make is that they are not realistic.  As I hinted above, every investment has its pros and cons.  If you invest and expect sizable short-term profits, you take on huge risks.  These risky deals may indeed work out, but you have to be ready in case they don’t.

This mistake is something that many investors make.  Even if you invest using long-term investments, you may be tempted to expect short-term results.  It will be difficult for you to stick to your long-term strategy when the markets are rocky.  But in order to be successful you must be able to avoid reacting emotionally to short-term swings in the market.

As you can see, these investment mistakes are easy to identify and avoid.  But don’t be fooled.  You will be tempted to make these mistakes.  My suggestion is to review this post once every 6 months and make sure you haven’t slid into one of these pitfalls.

What is the greatest investment mistake you ever made?  How did you correct the problem?

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Image: hobvias sudoneighm, via Flickr

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