5 Investing Mistakes You’ll Want to Avoid
Let’s face it. Making mistakes is part of life. And as long as we keep being human (which seems likely), we’ll keep making ’em. But that doesn’t mean we can’t strive to avoid some of the costlier ones. Here are five investing mistakes you’ll want to avoid.
#1. Waiting too long to get started
Alright, this is probably the most important one on this list. Mainly because it’s so easy to put off investing when you’re young. We get it. You’re probably either swamped in student loans or what little money you do have you’d rather spend on more enjoyable things while you’re young and fun. Both legitimate arguments.
But the sooner you can start investing, the better off you’ll be. Money invested in the stock market tends to double every 7 to 10 years. More years = more money later. And even if you don’t have a lot of spare cash to put to work yet, that’s okay. You can still get in the habit of investing and build up your portfolio over time.
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#2. Paying too much in fees
When you invest, you’ll want to keep an eye on fees. For most of us, a reasonable investment strategy involves holding an assortment of mutual funds and/or exchange traded funds (ETFs). And these charge annual management fees which will vary from about 0.1% (or less) on the low end to upwards of 1% (or more).
But higher fees don’t necessarily translate to better investment performance.
So you’re probably better off sticking with low cost index funds which can save you a lot of money in the long run. Also, if you decide to work with a professional, like a financial advisor, you’ll want to make sure you aren’t overpaying for advice. Again, more expensive is not necessarily better.
#3. Not diversifying enough
Diversification (along with interest compounding) is as close to investing magic as you can get. By spreading your money across a range of investments, you can reduce your risk of loss. If one investment goes bust, no big deal (or at least, less of a big deal). And you’ll also reduce the day-to-day fluctuations in your investment account balance – when some investments are going down, others may be going up, which will smooth out your returns.
For most people, a reasonable amount of diversification can be achieved by investing in a handful of funds. Nothing too crazy. You just generally want to avoid having a significant portion of your wealth tied up in only a few investments.
#4. Forgetting to consider taxes
Investment taxes are another big one that’s often overlooked. Sell a stock for a gain. You owe taxes. Get paid dividends on your stock fund. More taxes. Receive an interest payment on your bonds. You got it. Taxes again. The exact amount will vary depending on the type of payment and your tax bracket, but rest assured, Uncle Sam will want a piece of the action. This is why it’s a good idea to utilize tax-advantaged accounts like a 401(k) or an IRA, which can help reduce your taxes over time.
And you’ll also want to pay attention to your capital gains and losses (which investments have gone up and which have gone down) before selling an investment (since you’ll owe taxes on the gains). Some robo-advisors and asset managers will automatically try to minimize taxes when they rebalance your portfolio for you.
#5 Letting your emotions take over
Investing is a great way to grow your money over time. But the stock market can/will fluctuate on a daily, weekly, monthly basis. And these fluctuations can wreak havoc on your psyche. When the market is going up, you’ll feel like a genius and want to buy more. And when it’s going down, you’ll probably feel the panic like everyone else. But generally you don’t want to buy/sell your investments based on these feelings. Create a long-term plan and stick with it. You’ll be a lot better off in the long run.
Do your best to avoid them
As we said, some amount of mistakes are bound to happen. But if you’re aware of them and do your best to avoid them, your investments will be in a better place down the road.