Top Investment Mistakes to Avoid
New Investors Should Watch Out for These Ten Pitfalls in Investing
May 20, 2009
Part of a successful investment strategy is knowing how to minimize costly mistakes. The following are ten of the most common investment pitfalls for first-time investors. Those who work to avoid these mistakes will watch their investment portfolios grow.
Insufficient Income to Invest
Proper investment cannot happen unless there is money specifically set aside for this purpose. If there is not enough money to cover living expenses then there is not enough money to invest. Investors should also be sure to pay off any high interest debt (an interest rate higher then 10%), such as large credit cards balances, before investing money.
No Clear Investment Strategy or Goals
Investment is like a journey: determining the best route to take depends on where the person wants to go and how the person wants to get there. New investors should start by making a list of short and long-term goals, then assess the level of risk they are willing and able to take. Finally, investors should use this information to decide how much they want to invest in each type of asset class (i.e. stocks, bonds, or mutual funds).
Not Sticking to Investment Goals
Once an investment strategy has been decided upon, investors should work to stick to it. This includes monitoring investments on a regular basis. Often new investors get sidetracked by a hot tip or a sudden shift in the market.
Inexperienced or Inappropriate Adviser
Investors who plan on working with an adviser, should check out the adviser's references beforehand in addition to this person's fee structure. Be aware that an adviser who works on commission has an incentive to buy and sell, not to make a profit.
Lack of Portfolio Diversification
Investors often make the mistake of over-investing in one area or even one company. Investors in the stock market should try to spread their money around by purchasing stock in several companies across different industries. It is also a good idea to invest in foreign markets to take advantage of growing economies and to counter a weak U S. dollar.
No Patience for Investment Growth
Most investments grow over time, even in the volatile stock market. Many investors make impulsive mistakes, such as selling a valuable stock too quickly, as the market swings up and down.
Not Enough Research for New Investments
Investors must research potential investment instruments before committing funds. Even suggestions made by a qualified broker or adviser should be checked out. There are many ways to get the necessary information. One could, for example, get financial data on a company from a credit reporting agency, such as Experian.com or Dun and Bradstreet.
Trying to Time the Market
"Timing the market" means trying to determine the best time to buy specific stocks. Waiting for stocks to reach a low before buying or hit a high before selling is generally not a profitable investment strategy. Also, frequent trading can lead to high transaction costs which can quickly erode income. Successful investors rely on a combination of patience, planning, and research.
Not Enough Reinvestment
Investors who pull out earnings too quickly can stunt portfolio growth. There should be a significant amount of reinvestment so that earnings can compound over time.
Neglecting IRA/401K
Investors should not make the mistake of under investing in their IRA and/or 401K accounts. A Roth IRA , in particular, is an indispensable savings tool for those who qualify. In this retirement account, an investor's money can grow tax-free and can be invested in anything.
In short, successful investment is likely to come to those who base their investment strategy on avoiding the costly mistakes that trip up so many first-time investors.
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