7 Common Investing Mistakes (And How to Avoid Them)

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All investors make mistakes at some point. Some may make smaller errors than others, or less often than others, but no investor is completely immune.

Some of these errors may seem harmless but they can cost you a lot if they go unnoticed. However, most of them can be avoided simply by being aware of them.

So here’s a list of the most common investing mistakes, and what you can do to make sure you are not blindsided.

  1. Not having a clear investment goal
  2. Investing money you’ll need soon
  3. Not understanding the investment
  4. Trying to time the market
  5. Not diversifying your investments
  6. Not giving your investment time to grow
  7. Emotional investing

1. Not having a clear investment goal

While ‘making money’ is the goal, that rarely suffices as a clear objective when it comes to investing. Money is merely a tool used for achieving something - that should be the goal you clarify.

So the question to ask here is: What am I investing for?

Do you want an additional source of regular income? Do you want a safe, short-term asset with predictable returns? Or are you looking for long-term investment options?

Starting with a clear goal is crucial because it helps you know the most ideal investment that suits your specific needs and the amount of risk you can withstand.

It’ll help to protect you from making unnecessarily risky investments at the expense of your overall finances.

2. Investing money you’ll need soon

This problem mostly afflicts beginning investors, some of whom rush into investing before setting up a strong financial foundation to act as a safety net.

When this is the case, even minor money emergencies can undermine their investing progress because they have to interrupt their investments. This ends up costing a lot in fees and commissions, not to mention the cost of missing out on real investment gains.

You’ll know you are ready to invest when you have a healthy amount of savings to meet any near-term emergencies that might crop up. Until you have that amount safely secured, you are not ready to begin investing.

Read More: How to Set up an Emergency Fund in 3 Steps

3. Not understanding the investment.

This one is also common with beginning investors. Buying stocks in a business you don’t understand or an asset that’s too complicated is a recipe for disaster.

You might end up buying a worthless asset or investing in something completely incompatible with your overall goals.

Beginners can avoid this by investing in professionally managed assets such as mutual funds, ETFs, or REITs. Such assets are ideal because you get the advantage of professional expertise minus the hassle of researching financial reports and accounts.

4. Trying to time/beat the market.

Timing the market is where an investor tries to predict how certain investments will perform in the future, and then invests based on that prediction. For instance, if you can predict that a stock will go up or down, you can make trades to profit from that.

The problem is, no one can predict how the market will behave and profit from it consistently. There are simply too many factors involved that even the most experienced investors have tried and failed.

So what’s the better strategy? Invest for the long-term:

Identify high-quality assets, automate your investing process, and stay consistent. Then simply sit back and adjust what works (or doesn’t work).

Suggested: SIP – How to Plan, Simplify, and Automate Your Investing Habits

5. Not diversifying your investments.

While the possibility of loss is inherent in every investment, it can be managed and controlled through diversification.

What is diversification?

It’s investing in different types of assets to reduce your risk exposure to any single kind of investment. In effect, it involves buying various unrelated investments to ensure that you won’t lose everything in case one or more sectors are affected by a negative economic event.

Most beginners make the mistake of investing everything in one type of investment, leaving them exposed to losses in case of a bad market event. But since negative market cycles are unavoidable, it’s crucial to invest in more than one asset type to guard yourself.

In fact, by diversifying, you might just benefit when the unavoidable happens.

Suggested: Diversification: How to safeguard your investments

6. Too much focus on the short-term.

Time is the biggest asset in investing. It has a direct effect on how well (or poorly) your investments will do.

With patience, you can greatly amplify your investing returns by taking advantage of factors such as compounding. Long-term investors tend to do better because they understand this.

Expecting to make loads of profits within a few months is both unrealistic and unreasonable. Depending on the type of assets you buy, your investments will require time and consistency to grow meaningfully.

So it’s more beneficial to invest with a long-term outlook because that raises your odds for successful investing.

Also Read: Short-term vs Long-term Investing: How to Pick the Right Investment

7. Emotional investing.

If there’s one sure to lose your money, emotional investing is it. And usually, it’s a result of panic and impatience.

Take 2020, for example. Investors rushed to sell off their holdings after lockdown measures were put in place, resulting in losses for many of them.

This is a classic case of emotional decision-making in investing. Rather than making decisions based on the merits of the underlying assets, investors were motivated by panic and fear. As a beginner, you’ll be highly susceptible to these sorts of investing mistakes.

How do you avoid them? Simple; stick to your goals unless you have a very compelling reason to change course. Primarily, identify a high-quality investment and then take a long-term view.

Don’t just buy or sell because everyone else is doing it.

Over To You…

As you start investing, you will undoubtedly come across challenges and obstacles. These are all normal. The most important thing is that you keep learning as you go.

Doubling down on your objective is a good place to start because that single step will put all other things into perspective. So if you plan on doing nothing, at least get clear on what you want to achieve with your investment.

It might seem like a tiny step, but it will go a long in helping you avoid many other investing mistakes.