Whether you’re just starting on your investment journey or have already collected some experience, there are common mistakes that many investors tend to make. While some of them might just lead to you being able to reach your goal a bit later, others can lose you lots of money.
So in this article, we’ll share the 13 most common investor mistakes and how you can avoid them. Let’s go!
Mistakes that hurt the most
- Not having clear investment goals
Without a set goal, you won’t know whether you’ve reached it or not. Furthermore, the strategies you use, the assets picked for your investment as well as the riskiness of the investments all come down to what goal you set. So pick a clear goal that can act as a guidepost for your investment journey.
- Letting emotions get in the way
investing is an experience where there will be ups and downs. In both cases, emotions can lead you to making choices that will hinder your success eventually, be it buying a trending stock at the peak price or selling your holdings in a down market during a crisis. Keep your emotions in check, take a breath in and avoid quick decisions.
- Chasing the trends
This ties in with what we just said: Trends come and go, and it’s hard to predict what will be trendy, and for how long. So, you could easily buy into a stock like Zoom during the pandemic thinking it will take off, just to then ebb off and drop in value. Make long-term decisions instead.
- Trusting recommendations without double-checking information
What worked for somebody else might not work in your case. It might be outdated or need adaptation to apply to your circumstances. That’s why it’s imperative to fact-check any investment advice for yourself. After all, we’re talking about your hard-earned money here.
Other mistakes commonly made by investors
- Trading too much
A general advice you can see online is to invest in the long-term because that way you can sit out market movements. If you’re trading too much and trying to sell high and buy low, chances are you’ll miss the top and bottom and lose out on capital gains. Furthermore, trading often also means paying trading fees often, which loses you money.
- Neglecting inflation
Inflation is a topic that’s currently on everyone’s lips. What inflation basically means is that you can buy fewer things for your money. How this ties in with investing is that if your investment generates 5% returns per year, but the inflation rate is 7%, you’ve basically made net returns of -2%.
That’s still better than -7% if you were not investing, but it’s important to know that having more money doesn’t automatically mean you can buy or do more with it.
- Paying too high fees
Not only trading brings fees with it, but sometimes the account also has a yearly maintenance fee, funds a management fee etc. While a certain percentage or number of fees is understandable and okay, it’s important to compare fees.
- Putting all eggs in one basket
Diversification is king. This means that it makes sense to not invest all of one’s money into one asset, say Tesla stock, but diversify. This could be done by investing into an index fund, putting money into additional assets like real estate and P2P lending and even holding cash.
- Being impatient
Good things take time, and what applies as a general rule to life is just as true for investing. If you have a longer investment horizon, you won’t feel as affected by temporary market up- and downswings, but instead focus on the long-term 10, 20, 30 years in the future. And thereby not making hasty, emotional decisions.
- Not understanding what you invest in
While you don’t need to be a master in economics to start investing into stocks, bonds or P2P, it’s important to have a general understanding of economic rules. What are stocks? How do P2P companies make money? What is the average return in real estate? Whatever you’re going to invest in, get a fundamental understanding of it.
- Investing with money you can’t afford to lose
You have a great opportunity that promises to pay you 10% per week (Spoiler: It won’t) and are thinking about investing your rent money? Don’t do it. You’ll never know how the market performs, and even a perceived safe bet, can turn out bad, and you lose your money. If that happens with your rent and food money, you need to take up some high-interest debt. Not worth it.
- Falling for the sunk cost fallacy
The sunk cost fallacy describes a phenomenon where people will hold on to something that is already a lost case because they have sunk a lot of time/money/energy into it. An example would be buying a stock at 50 EUR each, which falls to 20 EUR and you buy more to bring down the average cost because you already bought so much of that stock anyway. Approach your investments methodically and logical instead and set clear rules.
- Never start
Arguably the biggest mistake you can make with investing is… to never start. There are many things you can learn from books, blogs or YouTube videos, but there are just as many you only learn by doing it yourself and gathering experience. Just as the saying goes: “The best time to plant a tree was yesterday, the second best is today”. The same holds true for investing. Go get your feet wet and just start.
Most tips essentially boil down to this: Make a clear plan, set rules and budgets on how you want to invest, and don’t let yourself be guided by emotion. If you follow these basic rules, then in the majority of cases you’ll have a much easier time restraining yourself from following the latest trend or trying to time the market.
Pick a long-term approach, diversify your assets and last but not least just start. There’s only so much theory you can learn, in the end you’ll need to get practical and feel how making an investment and going through harsh times feels.