Beginner's Guide to Investing (Part 2): Common Mistakes That Cost More Than You Know

 

Beginner's Guide to Investing (Part 2): Common Mistakes That Cost More Than You Know

In this second part of Beginner's Guide to Investing, you'll learn how to start investing wisely, avoid common mistakes, understand diversification, choose the right investments, and build a beginner-friendly portfolio.

 

Nobody is perfect.

The aim is not to make no mistakes, but to avoid the mistakes that take a lifetime to correct.

I have seen people spend weeks choosing the right app to invest in only to give in to the first hot tip that comes across their screen.

 

These are the most common mistakes that people make when starting their investing journey.

 

Chasing Last Year's Winners

 

When a stock price goes up, everyone wants to get on board.

By the time you do, the gravy train may have left the station.

Markets can be brutal to people who think they know what they are doing.

Before buying anything, ask yourself if you would still buy it if no one was talking about it.

If the answer is no, think twice.

 

Investing Money You Need Soon

 

This mistake is more common than you think.

People invest money they need to pay bills in the next few months only to panic sell when the market drops.

This is not a financial mistake; this is a poor budgeting decision.

Money you need to access within a short period of time should be kept in cash or cash equivalent.

 

Putting All Your Eggs in One Basket

 

It's easy to get caught up in the excitement of putting all your money in one investment.

While it may seem bold, it's actually reckless.

No matter how good a company is, there are always risks.

Managers can fail you, competition can crush you, and new government regulations can bury you.

Diversifying your portfolio will not protect you from losses, but it will ensure that one failed investment will not derail your entire financial future.

 

Trying to Time the Market

 

We have all heard of people who made a killing by buying low and selling high.

The truth is, not even professional money managers with teams of analysts and millions of dollars in research can time the market successfully.

If you have watched a few finance videos on YouTube this weekend, you will not be able to consistently beat the market.

The best way to profit from the market is to invest regularly and let time do its thing.

 

Not Paying Attention to Fees

 

This is one of the most common mistakes that beginners make.

Fees eat away at profits, and small differences in fees can have a major impact on long term gains.

Say, for example, that you have two mutual funds that have similar risk/reward profiles.

One has higher annual fees than the other.

While it may not seem like a big deal, over twenty years, the higher fees would have cost you significantly more in profits.

Always pay attention to fees.

They may seem insignificant, but they are not.

 

Understanding Diversification

 

Diversification is one of those finance buzzwords that everyone talks about but nobody really knows.

Here's the thing; it's not as complicated as it sounds.

Instead of putting all your money in one stock, diversification means spreading your money out.

Instead of buying shares in one bank, you buy shares in different industries such as healthcare, manufacturing, and technology.

By doing this, you are reducing your risk.

If one industry crashes, the other industries will help cushion the blow.

It's the same principle as a farmer planting different crops in the same field.

If one crop fails, the other crops will still yield a profit.

 

Asset Allocation Matters More Than Most Beginners Realize

 

When it comes to investing, most people focus on what to buy.

While it is important to know what to buy, it is arguably more important to know how much to allocate to each investment.

This is called asset allocation.

 

Here are three common asset allocations:

Conservative Investor

60% Bonds

30% Money market funds

10% Stocks

This allocation is suitable for people who want to minimize risks.

 

Balanced Investor

50% Stocks

30% Bonds

20% Cash investments

This allocation is suitable for people who want to strike a balance between minimizing risks and maximizing gains.

 

Growth Investor

80% Stocks

15% ETFs

5% Cash

This allocation is suitable for people who have a long time horizon and can withstand market fluctuations.

There is no right or wrong allocation; it all depends on your financial goals.

 

How Much Money Do I Need to Start?

 

You may be surprised to know that you need less money to start investing than you think.

One of the biggest myths about investing is that you need to be super rich to get started.

While this may have been true years ago, it is definitely not the case today.

The amount of money you need to start investing depends on the platform you choose.

Some platforms allow you to start investing with as little as a few hundred dollars.

The amount of money you have at the start matters less than you think.

 

Here's an illustration.

 

Let's say that person A decides to wait until they have a lot of money to start investing.

On the other hand, person B decides to start investing with small monthly contributions.

Who do you think will have more money after thirty years?

 

Choosing an Investment Platform

 

The platform you choose will not make or break you, but it can make the process of investing easier or harder.

 

Here are some things to consider when choosing an investment platform.

 

Is the Company Reputable?

Before doing anything else, make sure that the company is trustworthy.

This means checking if the company is registered with the appropriate financial regulatory agencies.

This does not mean that you cannot lose money.

It just means that you will not lose money to a scam.

 

What Are the Fees?

When considering fees, look out for account fees, transaction fees, withdrawal fees, and management fees.

While cheaper is better, it is not always the case.

 

What Can I Invest In?

Some platforms only allow you to invest in stocks.

Others allow you to invest in mutual funds, exchange-traded funds (ETFs), government bonds, and money market funds.

A diverse range of investment options is not necessary, especially for beginners.

However, it is good to know that the option is there as you gain more experience.

 

Is It User Friendly?

This goes without saying.

If the interface is as complicated as the 1998 tax forms, you will not use it.

 

Understanding Inflation

Inflation may seem like a small detail, but it has a huge impact on your financial future.

Let's say, for example, that inflation runs at 10% while your savings account only earns 4%.

This means that the money in your savings account is actually losing value.

While your account balance may be growing, your money is not growing.

This is why long term investors always keep inflation in mind.

While it is impossible to know what will happen in the future, it is important to invest in assets that have the potential to outperform inflation.

 

Should I Invest in Individual Stocks as a Beginner?

You can, but you shouldn't.

As a beginner, it is best to avoid individual stocks.

The reason is simple; individual stocks require due diligence.

You need to research the company's financials, industry position, and management team.

This is a lot to consider, especially for someone who is just getting started.

Most beginners choose mutual funds or exchange-traded funds (ETFs) because they offer instant diversification.

There is nothing wrong with being boring.

In fact, boring investors have made millions of dollars.

 

A Simple Example Portfolio

Let's say that Ada is a 27 year old who has an emergency fund and wants to invest for retirement.

She does not want to take unnecessary risks, but she also does not want to miss out on the potential gains.

 

Here's a simple example portfolio that Ada can consider.

 

Investment                    Allocation

 

Broad Market ETF            40%

Equity Mutual Fund         25%

Government Bonds         20%

Money Market Fund       15%

 

As you can see, this portfolio does not try to time the market.

It simply tries to reduce risk while still taking advantage of the long term gains that come with investing.

 

Frequently Asked Questions

 

Is investing risky?

Every investment comes with some level of risk.

The aim is not to eliminate risk; the aim is to mitigate risk.

 

Can I lose money?

Yes, you can.

Investment values are not static; they go up and down.

Long term investing will not protect you from losses, but it will cushion the blow.

 

When should I start investing?

The best time to start investing is when you have an emergency fund and no high interest debt.

 

Should I invest every month?

For most people, yes.

Investing every month is a good way to stay consistent.

 

Is investing better than saving?

They are not mutually exclusive.

Saving is meant for money you need to access soon.

Investing is meant for money you will not need for a long time.

Most people need a combination of both.

 

Final Thoughts

 

Investing is not about knowing what to do.

It's about knowing what not to do.

It's about understanding a few basic concepts and sticking to them, no matter how exciting the market seems.

 

Markets will always fluctuate, and it is easy to get caught up in the hype.

At some point, you will wonder if you made the right decision because your portfolio dropped by 20%.

 Maybe it will drop by 50%.

It happens to everyone.

The people who quietly build wealth over time are the ones who understand that investing is not about timing the market.

 It's about saving consistently, diversifying their portfolio, and letting time do its thing.

This may not be as exciting as short term trading, but it has proven to be much more profitable in the long run.