Things to Avoid When Investing for the First Time
It has been said that 47% of Americans do not invest their money, and younger generations are increasingly turning their backs on stocks, bonds, and other investment opportunities. They’ve been warned about the risks, they’ve heard the horror stories, and they’ve decided that their money would be better suited to being locked away in a checking account or savings account.
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But if you make the right decisions then the risks are minimal, and the rewards are high. First-time investors make many potentially costly mistakes and these mistakes are enough to turn them off investing forever. If you want to keep your risks low and your profits high, avoid making any of the following errors.
Not Understanding the Basics
If you don’t know what day trading is, you shouldn’t be doing it. If you don’t understand how stocks work, what the difference between blue-chip and penny stocks are, and what dividends are, then now isn’t the time to invest in the stock market.
Before you invest in anything, make sure you know everything about it. This is the 21st century, the information age—there’s no excuse not to educate yourself on the basics.
It’s also important to understand the potential profits and losses, as well as the risks and liabilities of the thing you’re investing in. By the same token, you should understand the fees that investors charge, from penalty fees to withdrawal fees and commissions.
This will ensure you don’t make a mistake that costs you dearly.
Invest in Trendy Things You Know Nothing About
When investing in collectibles and art, it makes sense to invest in items that you like and know a lot about. That way, you can enjoy it while waiting for it to appreciate. You’re also more likely to understand its value and its potential than someone who doesn’t know anything about the topic. However, jumping on the investing bandwagon simply because it’s trendy is a risky strategy.
As an example, whiskey is pretty big right now and many Scotch and Japanese whiskeys are appreciating significantly. But if you don’t drink it, don’t like it, and don’t know anything about it, you should either do your research or move onto something else.
However, there are exceptions. For instance, just because you have a thing for video games, doesn’t mean you should invest in them, hoping that they will somehow appreciate. If there is no precedent and no proof, look for something else. Also, when it comes to the stock market, be careful of where you invest your money.
Many first-time investors choose to buy stocks in companies they like, companies that they use on a regular basis. But just because you like pizza doesn’t mean you should invest in Dominos. It’s a different story if you know a lot of about the pizza industry and have some information suggesting that a particular company will do well, but don’t throw money at a company just so you can tell your friends and feel better about yourself the next time you place an order.
Investing Too Little or Too Much
Every time you invest in the stock market, you will pay a commission and this commission eats into your total profitability. For example, if you’re investing $300 in stocks, you may pay a commission of $30. If you’re using an online trading platform, that commission will remain the same regardless of the amount you invest.
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This $30 will effectively reduce your worth by 10%, which means the stock needs to grow by at least 10% before you can start making a profit and thinking about cashing out. However, if you invest $3,000, that $30 accounts for just 1% of your total investment, which means it needs to grow by much less to become profitable.
At the same time, you shouldn’t invest too much money at once. Stick to an amount that you can afford to lose, because there’s always a slight risk that you will and even if you don’t, that money may be out of reach for a few months.
Don’t Get Too Excited or Scared
Investors are risk-takers, gamblers. They make big money because they take big risks, holding onto investments longer than the average person would.
A first-time investor, for instance, may consider selling stock as soon as it hits a 10% or 20% gain, believing that a profit is a profit and worrying that if they miss their chance, they will lose that small gain.
But what happens if you had done this during the rise of IBM, Apple, Amazon or Netflix? You would have a 20% profit, which is great, but you would have missed out on a profit in the thousands of percent.
Don’t let that eagerness get the better of you and don’t sell too soon. At the same time, you should rethink decisions to cash in your asset when it starts performing poorly.
This happens all the time in financial markets; stocks drop and rise, and if you want to be a profitable investor you need to ride this rollercoaster. For example, the dot-com bubble saw the rise of Amazon and eBay towards the end of the 1990s. When the bubble burst, the value of these companies was decimated, turning million-dollar investments into worthless junk.
Within a few years, however, those investments had returned to their peak and today Amazon is one of the richest companies in the world, with a valuation that makes its peak price look like a penny stock.
One of the most important rules of investing is to diversify as soon as you can and as much as you can. Every financial expert has their own rule of thumb, a guide to where your money should go in terms of percentages, such as 25% in stocks, 25% in bonds, and 50% in savings accounts. The specifics don’t really matter—just make sure you don’t have all your eggs in one basket.
This will safeguard your money and prevent you from losing everything in the event that a company folds or a market collapses.
Not Compounding their Return
The reason your credit card bill is so high is because interest compounds. Every day, a small percentage of interest is charged on your balance and it begins to grow. The bigger it is, the more interest will be added during future days. This is known as compounding interest, and it’s a technique you can use to grow your investments as well.
Every time you earn money through dividends, savings, and sales, put all of that money back into your investments. Many first-time investors will cash their earnings as soon as they can, pocketing the money and waiting for the next big payout to come. But if they put their money back into their investments, they could grow significantly quicker and produce a much greater return.