Investing. Something that brings fear to most people. Most of us have no friggin clue how to go about investing.
Is investing overwhelming? Yep.
Is investing unnecessarily complicated? You bet.
Is investing sometimes scary? Oh yeah.
But you know what? Investing doesn’t have to be any of those things. It can become part of your life that you look forward to. Investing can become part of your life that you are excited for and not part of your life that you dread.
Because I’m here to help you. I want to help give you the tools that you need to be successful in your financial future. You don’t have to subscribe to my email list (although that would be cool of you).You don’t have to watch my YouTube videos (although that would be cool also). And you don’t have to buy anything from me if you don’t want to.
But If you want to be fiscally fit and you should really take to heart my advice.
With that being said, let’s get into the ways things that you should avoid when investing.
(1) Not Diversifying Your Investments
Diversification is a really fancy way of saying that you should not have all of your eggs in one basket. For example, if you own 100 shares of stock in just one company you are not diversified at all. But if you own 10 shares of stock in 10 different companies then you are diversified. And if you own 1 share of stock in 100 different companies then you are REALLY diversified.
The reason for diversification is that if you are invested in one company (or even an entire sector of the market) and that company (or sector) goes down in value or collapses then you will still be okay. You’ve only lost a portion of your money. But if you had all of your investments in that one company or sector then you would have lost all of your money. And sadly, this happens to people all the time.
Lack of diversity in one’s investments is becoming a bigger and bigger problem with users of companies like Robinhood and other investment apps. Most individual investors don’t diversify their investments properly. What happens with investment apps like Robinhood is that someone hears from someone else that a particular stock will go up (or is going up now) and they buy it. They don’t try to balance their portfolio by purchasing other investments to achieve diversification.
Yeah, yeah. I know some of you are saying, “But Doug, Warren Buffet doesn’t believe in diversifying investments. So why should I?”
My answer: Warren Buffet doesn’t diversify his investments because (1) he has a ridiculous amount of money, (2) he COMPLETELY understands his investments more than you or I could in ten lifetimes, and (3) he has been investing for decades and has achieved diversification over time by the sheer volume of his investments.
To make sure that you always have diversified investments, invest in mutual funds. If you want to invest in particular companies as well, cool! Just make sure that you are investing mostly in mutual funds first and you will be golden.
(2) Timing the Market
This is another term that is thrown around by financial professionals all the time. Timing the market means you are waiting to buy an investment when it has dropped to (what you think) is the bottom and selling that investment at (what you think) is the top.
Unless you do this professionally or you do this with a very small amount of money that is inconsequential to your overall financial future, DON’T DO THIS.
There are thousands of financial analysts who are paid a LOT of money to time the market and who really suck at it. If you don’t have a strong financial background and already have a lot of money to fall back on then avoid timing the market.
Just buy into diversified investments and let it ride for the long run.
This leads me to my next point.
(3) Not Giving Your Investments Time to Grow
This one is big. (Insert Michael Scott meme.) So many investors don’t give their investments time to grow. Most people invest in something and then cash it out the moment it goes down a little.
Pro tip: Investing is a long game. You won’t get rich overnight no matter how many times you watch The Big Short or The Wolf of Wall Street. You have to give your investments time to blossom.
If you think you can plant a garden and then think that you will reap a harvest by the weekend, you can’t. This isn’t Farmville. Investing doesn’t work that way.
If you are going to invest money, make sure that you have a minimum time frame of 5 years that you will leave that investment alone.
And remember that if you pull out an investment that you have had for less than a year you will most likely be taxed pretty heavily on that investment.
(4) Inconsistently Investing
If you want to become wealthy you MUST invest consistently. You cannot invest money out of one paycheck and not out of another. To become wealthy you must invest out of EVERY paycheck.
Put your investing on autopilot. Invest a specific dollar amount or a percentage of your pay each time you get paid. If you are inconsistently investing you will eventually stop investing altogether. Something will come up. You will find another use for the money that you used to invest and tell yourself, “I’ll invest when I have more money.”
Trust me, it won’t happen.
When you first start investing, it can be difficult. I get it. But after a while you will see your balances grow, the interest accrue, and your accounts get fatter. I promise.
(5) Not Understanding Your Investments
Wow, this one is big. (Insert another Michael Scott meme.) First let me say this: You don’t have to have a masters degree in finance or be a CPA to understand investments. You don’t have to know how to evaluate a UBPR or a 10-k or how to use the Capital Asset Pricing Model. But you should understand the product that you are invested in.
When you are thinking about investing and either interviewing investment advisors, researching annuities, or learning about a specific fund that you are considering you should have a basic understanding of what it is you are investing in.
You don’t have to understand every nook and cranny of the investment, but you should understand,
- Every fee that you are being charged
- The historical performance of the product that you are investing in
- The ethical nature of the advisor, web site, app, or investing platform that you are using.
If the fees that you are paying don’t add up or someone can’t explain what they are or why they are being charged, then invest somewhere else.
If you can’t be told the performance of the investment in the past, then choose a different product and go somewhere else.
And most importantly, if you feel like you are being bullied, slimed, or otherwise coerced into buying a particular product, leave that person or company and tell your friends about it.
YOU SHOULD NEVER PURCHASE AN INVESTMENT THAT YOU DON’T UNDERSTAND.
If the advisor or representative can’t (or won’t) explain the investment product to you so that you can understand it, then leave that advisor. Period.
Sadly, I have seen that scenario play out multiple times.
It’s your money. You work hard for it. Don’t EVER let someone else take it. You should give it to them willingly.
End of soap box.
(6) Making Emotional Investment Decisions
This is the one that can trip up even the most seasoned of investors.
We say things like, “I’m really scared the market will fall” or “I am afraid to lose money”.
Too many times when we see an investment going up we want to jump on the bandwagon and ride it to the moon. The problem is that if the investment goes down just a little bit we get scared and jump off.
I’ve seen it hundreds of times. People who don’t have the stomach to invest and make emotional decisions. SOOOOO many people get excited when the price of something goes up and they buy. And then they get scared when the price of something goes down and they sell.
The problem is that if you do that (and most of us have at some point in our investing lives), that you did the opposite of what you should have done.
You bought high and sold low when you should have bought low and sold high.
So if you are going to invest, make sure to let the investments ride for at least five years no matter what they do. Don’t get scared when they go down and don’t get swept up in the craze when they go up.
Don’t let your emotions rule your investing life. Pretend you are a robot when you are investing.
Final Thoughts
Investing can be tricky sometimes. But If you avoid making these mistakes you will avoid the mistakes that trip up even the most experienced of investors. You will avoid 99% of mistakes that other investors make and be WAY ahead of most other people.
At the end of the day, I want to give power to you. I want to help you become fiscally fit and be able to handle your investments and grow your portfolio.
I wish for you to build the life that you have always wanted and I want you to ultimately be happy.
I hope that this has helped a little bit.
And if it did, please share this article with a friend. 🙂
Until next time!
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