The 7 Worst Investment Decisions Beginners Can Make

Deciding to start investing is one of the best decisions you can make. Investing is an important step in building wealth and achieving your financial goals. However, investing successfully can be difficult and there are some important mistakes you should avoid.

Here are the seven most common investing mistakes beginners make when they start investing.

1. I’m waiting to start investing

There can be many reasons not to start investing, especially if you are early in your career. You may start with a relatively low salary and not have a lot of additional savings to invest each month. But saving and investing as much as you can when you’re young, no matter how small, will set you up for success later in life.

Money you invest in your twenties has more time to compound and grow than money you invest later as you approach retirement age. A $1,000 investment at age 22, growing at 10 percent annually, is worth just over $45,250 at age 62. If you wait 10 years to invest at age 32, that $1,000 will only become $17,450 by age 62. These first 10 years are important for building wealth.

2. Trying to time the market

One of the most common mistakes investors make is trying to time the market. When timing the market, you need to enter and exit stocks based on your predictions about where prices are going next. Recession approaching? Sell! Is only growth ahead for you? Buy!

In theory it sounds simple and easy, but in reality it is far more difficult. Investors who try to time the market risk missing out on profits and often end up buying at much higher prices. The stock market often moves in ways that are far from obvious.

Imagine if an omniscient mind told you about the pandemic that would break out in early 2020. You probably would have thanked him and sold your shares. Sure you would have avoided the initial decline, but you probably would have missed out on big gains in the second half of 2020 and beyond.

For most people, a far better approach would be to make consistent contributions over time so that your portfolio can benefit from dollar-cost averaging, which has proven to be a successful long-term investing approach.

3. It is not possible to find a suitable employer

Many employers offer to match a portion of their employees’ retirement contributions, and investors would do well to take advantage of this perk. Experts say an employer match is like “free money” that you don’t want to leave on the table.

This is how an employer match could work. An employer may agree to match 50 percent of the employee’s pension contribution up to the first 6 percent of the employee’s wages. You should make sure that you pay in at least enough money so that you receive the full match from your employer. It’s like getting a guaranteed 50 percent return on your contributions.

4. Don’t invest IRA contributions

Another mistake that inexperienced investors sometimes make is not actually investing the contributions they make to their traditional or Roth IRA. Contributing to an IRA is one of the best things you can do to increase your retirement savings. However, it is important to understand that the IRA is not an actual investment.

Once you’ve contributed to an IRA, you’ll need to purchase an investment, such as an ETF or mutual fund that holds stocks or bonds. You can also use an IRA to purchase individual stocks or bonds, but these purchases require more research and are usually better suited for experienced investors. Low-cost index funds work well for IRAs because they offer investors a diversified portfolio that doesn’t require a lot of financial knowledge.

5. Investing in something you don’t understand

The markets are full of interesting opportunities and there are always analysts and commentators ready to offer tips on the next great investment. But only investing in things you understand is a good approach.

Investing in something you don’t understand seems fine as long as the price goes up, but what happens when the price goes down? A solid understanding of a stock’s underlying business gives you the confidence to stick with an investment even if the stock has fallen since you purchased it.

Sometimes it can be helpful to ask yourself whether you would be comfortable buying more of an investment if the price fell by 20 percent. If the answer to this question is “no,” you probably don’t understand it well enough to even own it.

6. Paying too high fees

Many investors initially invest in funds that offer a diversified portfolio, but not all funds offer high returns to their shareholders.

Actively managed funds attempt to outperform the returns of broad market indices such as the S&P 500, but the vast majority of them fail to do so in the long term. In addition to this underperformance, active funds also charge significant fees, often approaching one percent per year. Fees reduce the return that shareholders ultimately receive and can place a significant burden on the success of your investment.

Taxes can also be viewed as a fee, and many new investors often trade in and out of positions without understanding that they are making profits that will be taxed. Adopting a buy-and-hold mentality is more tax efficient because you don’t pay taxes until you make profits by selling a position.

7. Excessive focus on a single investment

Another mistake beginner investors can make is investing too much of their portfolio in a single investment. Sometimes people get into investing because they want to invest in a specific company like Apple or Tesla. If the stock performs well, it can become a significant part of your portfolio.

However, investing a majority of your portfolio in a single stock increases the degree to which your future returns depend on that single investment. It’s often far better to build a diversified portfolio that includes stocks from different sectors and industries so that you’re not as exposed if a single company suffers declines.

Conclusion

Investing is a great way to build wealth over time. Don’t think too much about whether now is the perfect time to invest or not. The important thing is to get started, develop a plan for regular deposits and build a diversified portfolio. New investors may find it helpful to speak to a financial advisor about their individual situation. Bankrate’s financial advisor matching tool can help you find an advisor near you.

Editorial Disclaimer: All investors are advised to conduct their own independent research on investment strategies before making any investment decision. In addition, investors should note that the past performance of an investment product does not guarantee future price increases.