Are you new to investing? Are you currently trying to figure out the 5 mistakes to avoid as an investor? The fact that you’re here proves that you’ve started off on the right foot. Researching and getting familiar with the investing ground is the best way to start.
Often, too many people go into the investing ground with no idea of what they’re getting into. This rarely has positive consequences. It is always a good move for investors to have a plan of action before they start investing.
However, besides starting off without any prior knowledge, there are other mistakes that one could make when it comes to investing. These mistakes could lead to the loss of millions of dollars in the short and the long-run, so make sure to know the top 5 mistakes to avoid as an investor.
Let’s get right into it!
Waiting Too Long
You may be thinking that right now you have too many things going on to focus on investing, or you’ll simply start when you have more money to start investing. But… what you’re not realizing is that by waiting, you’re only increasing the amount that you’ll need to contribute to your investments if you want to reach a certain amount by a certain age.
I’ll explain… When you start investing early, you have the power of compound interest on your side. Waiting too long destroys this power.
As Einstein once said, “Compound interest is the 8th wonder of the world. He who understands it… earns it. He who doesn’t… pays it.” When you have compound interest on your side, you don’t need to contribute as much to your investments to reach a certain goal because your money has more time to earn more money.
This means that what your money earns, earns more, on top of what you’re regularly contributing. Take a look at the graph below.
Under the circumstances above, with a rate of return (ROR) of 8% annually, a person contributing $160 monthly will reach $522,165 by only contributing a total of $76,800 over a 40 year period.
Compare this to a person starting 10 years later. They would need to contribute $366 monthly to reach around the same amount by the same age. And if we want to go even further, a person starting 20 years later would need to contribute $905 monthly.
You can see how much these numbers jump the longer you wait.
So remember, start NOW. If you start now, you don’t need as much to reach a lucrative goal, keep in mind that the example doesn’t even include reinvested dividends, or a gradual increase in contributions. This means that your investment will end up being even more when including these variable factors.
Speculation is so often confused with investing. Often, beginners walk into the investing ground calling themselves investors but simply buying stocks because they’re counting on their value to climb up, without any fundamental data to back that up.
I’ll put it as clear as Benjamin Graham—Warren Buffett’s mentor— put it, “An investment operation is one which upon thorough [fundamental] analysis, promises safety of principal and an adequate return. Operations not meeting this requirement are speculative.”
When you confuse speculative transactions with investments, you lose the leverage that a long-term investor has. Even worse, you’ll end up making emotional trades and losing a lot of money.
Although I don’t think that trading is a bad thing, it is always a good idea to know which part of your portfolio is designated for trading, and which one is going toward investments. And whatever you do, please don’t simply trust anyone with your money to tell you which hot stocks you should be buying to become the next Warren Buffett.
There are so many fake gurus everywhere who fanatically hype their audience up about trading. Making it seem like it’s easy money.
Don’t fall for their scams, you will lose money. Don’t make quick money a priority, long-term growth is your first priority. You can have money for speculative transactions but it is not advisable to plan on that as your retirement income.
Do your research, plant your seed, be patient, and keep speculations separate from investments, you’ll be greatly rewarded in the long run.
Not Paying Attention To Broker Fees
Whenever you’re looking for a broker to invest with, watch out for their brokerage fees. In this developing world of brokers with 0-commission fees for transactions, it’s important to pay attention to how your broker is still making money.
If the broker you’re using still charges commission fees for your transaction, chances are their other methods of making money are not going to be as variable as those of a broker that charges no commission fees.
Different brokers charge different fees. Sometimes, these fees are invisible to the investor if they don’t pay attention. So whenever you’re looking for a broker, make sure you’re aware of which services you’ll be using on their platform, and which of those services will cost you money. Depending on what you plan on doing as an investor and how you plan on investing, you might benefit from some brokers more than others.
Start by looking at brokerage reviews. Learn who each broker is aimed at, and which one you could take advantage of as an investor.
Buying The “Hot Stocks”
Be careful when buying stocks. Don’t just buy stocks because other people are telling you that they’re the best next thing to buy, or that you’ll become a millionaire by buying these stocks. Doing this ties directly into the fear of missing out (FOMO).
If you’re investing for the long term, you don’t want a stock that’s only going up because the media and the FOMO buyers are pushing it up, that’s an artificial push. The value of the company isn’t actually being tied to the prices of its stock. The price of the stock is simply being pushed beyond the intrinsic value of the company.
As an intelligent investor, you must learn to ignore what the media tells you and base your investment operations upon fundamental analysis. If you’re trading, that’s fine, fundamental data doesn’t apply as strongly. But we are referring to the long term investor whose intention is to build wealth well into their later years, not only the quick buck.
If you really want to ensure long-term wealth, you need to be patient. In this fast-paced world, we want everything NOW. But we lack the recognition that great things take time to build.
Don’t fall into the trap of wanting to become a millionaire by tomorrow simply because you saw some lucky ass kid on the news who did it. We never stop to think and realize that we’re on our own journey. Wanting fast wealth like that is equivalent to buying a lottery ticket, you might as well do that instead.
Investing Too Little
If you’re investing and building long-term wealth, you can’t be too stingy about investing while splurging on the newest pair of Yeezys.
Yes, if you’re early, it’s okay to not put as much into your investment portfolio because compound interest is on your side… but if you have enough to contribute more, why not do that?
Your number 1 tool to building wealth is your money, are you leveraging your money by putting it into lucrative investments, or are you putting it into something that will lose more than 50% of its value within the next year?
Now, I’m not telling you to sell or stay away from buying basic necessities for the sake of investing. Take care of yourself, your basic necessities, build an emergency fund, buy a house, etc. but don’t be spending on Yeezys and Starbucks coffee simply because you got an unexpected bonus from work. Put that money to work!
It’s better to have as much money as you can working for you than to be working for as much money as you can get for the rest of your life.
Avoiding these 5 mistakes will save you MILLIONS in the long-run. However, with all this said, have you made any mistakes not listed on here? Please let me know in the comment section below. I love reading and replying to your feedback!