On those first steps into investing, everything is exciting and new, it’s the start of a wonderful journey that hopefully brings great rewards, but this is a journey with many challenges. The good news is that this journey into investing has been travelled many times before, and one of the golden rules of investing is to always learn from other people’s mistakes, because it’s cheaper than making your own! With that in mind, here are some mistakes that new investors often make, and how best to avoid them yourself.
1. You never know enough
The first mistake that new investors mistake is to jump into an investment opportunity without doing enough research. This is often just simply a rush to get involved, the adrenaline flows and you want to do something, but sometimes it is the idea that your ‘instinct’ will guide you. Both of these can lead to problems, the truth is you can never know enough about a potential investment. If you are looking to buy stocks, research the company, what its market is, what are its business plans, is there potential weakness? All of this can help guide you to a safe, successful investment.
2. You are not gambling
This one ties back to the first mistake, investing is not gambling, no hunches, no hot tips, this is no time to ‘trust the force, Luke’! Investing is about informed decision making, taking a position you are comfortable with and will hold as necessary. Gambling on the stock market is a sure-fire way to go broke, quickly. Be smart, be informed, and be an investor.
3. Understand risk and return
While it is not gambling, it is important to remember all investing carries some risk, you can mitigate this through your research, but there will always be risk. The mistake often made is not assessing the risk on any investment, In the early days, this often happens when you find an opportunity that has the potential for impressive returns, where eagerness gets you involved without understanding what you could potentially lose.
Always know the downside, that is how much you could lose, and never risk more money than you can afford to lose. Indeed, this is another aspect of risk that can be a problem for newer investors, the level of risk involved. We are all different, some of us love the volatility of small cap investments, the potential for gains and the risks involved, others prefer much lower risk.
Know yourself, know what you are comfortable with, and find investments that match the risk levels you are comfortable with. Taking on more risk than you like can be a problem because it will affect your judgement, causing you to second guess the market or yourself. It’s OK to be risk averse, you can still be a highly successful investor, just find the investments that suit.
I strongly recommend reading following article about the differences of speculating and investing. You will understand what I mean about taking risks. Read it here “Investing and speculating“.
One thing that happens frequently for newer investors is the failure to diversify. After finding those first promising investments, it can be tempting to just put everything into them, but here is the problem. If that one investment goes wrong, you could lose a significant sum in one go. This is known as being overexposed to the risk of that investment. Instead, a portfolio approach allows you to spread your investments across a range of opportunities, which is a much more stable approach.
Think about it this way, if you have one investment and it goes wrong, then your investment went wrong. If you have five investment opportunities, and one goes badly, but four do well, then you will have some success to show for it. This is actually a continuation of risk assessment, spreading investments across multiple investments lowers the risk overall.
5. Don’t forget the costs
Having some success as an investor is a rush, especially the first ones, but remember the additional costs and find ways to minimize them, every penny counts. There are two type of
costs, the first are fees, be they trading fees and/or brokerage fees, and the second is tax. Not all brokers and trading platforms are created equally, and ideally before you started having some success, you will have done some research into this and found a broker that offers low fees for your style of investment. If you didn’t, do it now, if you can change brokers and save money, why not do it?
The second area to think about is tax, consider the tax liable on profits when working out your risk and profit on any potential investment. Being aware of the tax cost can help avoid a situation where your potential losses are higher than the potential post tax profits, but lower than the overall profit, which could be a risk level you do not want to accept. As with every aspect of investing, knowing the level of profit you will actually receive after tax can help provide informed decisions, and again make you a better trader.
Investing is a wonderful opportunity for anyone, but it is really important to know the challenges you face as a new investor. While this list will not stop you from making your own mistakes along the way, it can help you avoid the problems that many who jump into investing often make. If there is one piece of advice that sums up the process of going from new investor to a success, it is simply that you can never know enough. Information is key in every aspect of investing, and being well informed at every stage of the process is the best way to find that success for yourself.
by Aimar R.
Owner and Senior Contributor