One of the best methods to develop long-term wealth is to invest. You’ll likely earn great profits and beat inflation if you invest over time. However, not every investment idea is sound, and if you’re not paying attention, you could end up making costly blunders. The following are some of the most typical investment blunders to avoid. And don’t assume it’s too late if you’ve already made some of these errors. You can take steps to improve – and be richer in the future – if you acknowledge the error.
Here’s our list of the top 9 investing mistakes to avoid when planning for your financial future.
1. Waiting Too Long to Start
People give a multitude of reasons for why they haven’t started investing, ranging from “I don’t have enough money” to “I don’t know what to invest in.” The good news is that anyone with a small amount of money can begin investing. Applications and businesses that help people invest tiny sums of money are easily available. If you’re not sure what to invest in, starting with an indexing strategy or a robo adviser can be a good way to get started while you learn the ropes.
2. Having the Resources but Failing to Invest When You Can
It’s critical to develop the habit of investing more once you’ve already established the basic habit of investing. Let’s be real. It’s unlikely that $200 per month will be enough to establish the retirement portfolio of your desires. As your resources grow, so should your investment amount. To better determine how much you should set aside for a prosperous future, use an investment or retirement calculator.
3. Trading Too Much, Too Frequently
Some day traders are extremely successful. However, frequent trading can be a costly mistake for most investors. When you trade too much, you risk incurring fees that reduce your true earnings. Next, frequent trading necessitates the ability to recognize when it is the best time to act, which is difficult to predict and can result in significant losses. Finally, trading frequently, particularly day trading, might be stressful. You must be willing to lose a large sum of money one day and confident in the knowledge that you will have to make it up the next. That requires a lot of guts and a high risk tolerance.
4. Falling Into the Popularity Trap
When an investment becomes so popular that everyone wants to buy it, it has most definitely reached its peak. People are more likely to buy when an asset has previously experienced a price increase. If everyone is buying, you’ve already arrived late to the party. You might be able to scrape out some gains, but that will almost certainly only happen after the eventual pullback.
5. Underestimating the Time Horizon for Assets
Investors frequently misjudge the amount of time their portfolio will need to sustain them. People are just living longer today than they were decades ago, thanks to dramatic breakthroughs in health care and nutrition, which means their money must last longer. Knowing your life expectancy can spell the difference between success and failure when it comes to investing. The ability to accurately identify the investment time horizon, or the amount of time an investor’s assets must work, is one of the primary drivers of a successful portfolio strategy.
6. Ignoring the Impact of Inflation
All too frequently, investors focus on the dollar value of their portfolios rather than their purchasing power. Inflation can erode the purchasing power of a portfolio over time. Inflation has averaged around 3% each year since 1925, though it does vary over time. It can spike rapidly, as in the mid-1970s and early 1980s, or remain relatively stable, as in the last decade.
If we assume prices continue their long-term trend and rise about 3% per year for the next 30 years, an investor who currently requires $50,000 to cover annual expenses will need approximately $67,000 in 10 years, $90,000 in 20 years and about $120,000 in 30 years just to maintain the same purchasing power.
7. Turning Away From a Long-Term Investing Strategy After Being Hit With a Loss
Some investors may be tempted to sell their stocks whenever they “come back to even” after a slump or bear market. Such emotional decisions might be hazardous since they divert attention away from their investment objectives. It’s critical for investors to keep focused on their long-term strategy during times like this. Stock markets may be turbulent and frightening at times, as experienced investors know. However, traditionally, this volatility has been accompanied by a benefit: higher long-term returns than bonds. Since 1926, the stock market has averaged a ten percent annual return. This applies to both bull and bear markets. Though staying cool during periods of extreme volatility can be difficult, recording market advances above past highs is critical for long-term stock market gains.
8. Making Investments Based Only on Information That’s Well-Known and Widespread
Many investors read newspapers, magazines, and newsletters on a regular basis. Unfortunately, hours of research may not be enough to beat the market. Why? Because capital markets price in all well known knowledge efficiently. Share prices reflect news as soon as it becomes available to the general public. Looking at the same thing as everyone else does not provide investors a competitive advantage. Despite this, many investors continue to make trading decisions based on publicly available data. That isn’t to mean that news should be dismissed. Rather, we believe that in order to outperform the market over time, investors must either know something that most others don’t or accurately interpret commonly known data. This unique expertise and insight can help you capitalize on opportunities.
9. Believing You Have to Beat the Market to Succeed
It’s satisfying to be able to boast about “outperforming the market.” It helps you feel smart to outperform the market. However, beating the market isn’t the only way to be successful. It’s more about whether you’re investing in a way that will help you achieve your long-term objectives. To be a successful investor, you don’t have to beat the market. Instead, make sure your portfolio is expanding and that you’ll have all you need in the future. In many cases, simply keeping up with the market with the help of indexing is enough to ensure long-term success.