Seven Investment Mistakes Rookies Make
Are you making any of these seven rookie investment mistakes? With all the new investing technology available to the public, there has a been a rise in “Do-it-Yourself investing”. But with that has also come a rise in easily avoidable “rookie” investment mistakes.
Rookie Investment Mistakes
Mistake #1: Investing Money that You’ll Need Soon
As long as you don’t need your money right away, the stock market is a great place to put it. But if you think you will need that money in the next two or three years, you’ll want to park it elsewhere. Money that you invest into the market should be long-term money that you don’t need anytime soon.
Why? Because when (not if) the market declines, it will probably take time for the stocks in your portfolio to recover. If you need cash now and can’t wait for the market to recover, you’ll likely be taking losses. Stocks grow at a higher rate than most other investments, but the growth happens over decades. Some years the market is down and some years the market is up. It is a rookie mistake to invest money you cannot leave in long enough to let time work for you.
Mistake #2: Acting on Advice from Questionable Sources
Who hasn’t offered an investment tip? Maybe a co-worker, a relative, a friend or someone else have shared a “great stock tip”. But where did they get their information? (Insider trading is a totally different kind of mistake.) It’s difficult and rare for experienced investors to “beat the market”. Think twice before acting on investment advice from friends, family members, or really anyone other than a fee-based Registered Investment Advisor or a Chartered Financial Analyst.
Mistake #3: Allowing Emotions to Drive Investment Decisions
Fear and greed are powerful emotions. A common rookie mistake is to make selling or buying decisions based on fear or greed. Portfolio management is a marathon stretching across many market cycles. It is a rookie mistake to let market dips scare you into divesting. A Registered Investment Advisor can help you prepare — and stick to — a long-term plan for your investments.
Mistake #4: Trying to Chase Performance
Basing today’s investment decisions on yesterday’s performance is not a good move. By the time a stock becomes “hot” it may be at or near the top. Those large gains may not last, and you could find yourself buying high. Chasing performance is a classic rookie investment mistake.
Mistake #5: Trading Too Much
Jumping in and out of stocks too often creates a few problems: 1. Trading commissions could eat away at your principal 2. Your stocks don’t get a chance to increase in value or pay dividends. 3. You could be realizing short-term gains and paying a higher tax rate than on those short-term gains compared to if you held the stocks for a long-term holding period and enjoyed a lower tax rate on the gains.
Mistake #6: Putting All Your Eggs in One Basket
Successful, long-term investors understand the need to diversify their portfolio, distributing their investments over several asset classes. Putting all your money into one stock, or one type of stock leaves you vulnerable to drops in that stock or stock class. Diversification spreads the risk around and minimizes the likelihood that all your stocks will move in the same way, at the same time.
Mistake #7: Impatience
Rookies are often surprised to see how much variation there can be in the market in a day, a week or a month. They typically jump out of the market at exactly the wrong time. When you make your investments, fund them and let them work. Don’t check your portfolio every evening to see how it did that day. You might see something you don’t like and make an impatient and/or emotional mistake. Better to check it quarterly. Time is on your side.
Avoiding Future Investment Mistakes
Many successful individuals have achieved their success by listening to their hearts and following their gut feelings. It may be difficult to let go and trust others. But you owe it to yourself and to your future investment success. Talk with an Investment Advisor .
Ned Karren is a Chartered Financial Analyst and a Registered Investment Advisor. He is a founding partner at KKRA, opening the firm in 1983. Ned earned a degree in Economics at BYU (1967) and an MBA degree from Northwestern University (1969). He is a portfolio manager and holds primary responsibility for the KKRA’s Growth Equity Strategy.