7 Common Investing Mistakes and How to Avoid Them

common investing mistakes

Making mistakes is a natural part of the learning process. However, when it comes to investing, mistakes cost money. To help you to prevent making some of the most common investing mistakes you will find a list of seven mistakes novice investors often make and how to avoid them.

1. Investing Without Investment Goals and a Plan

Having a clear investment plan and realistic goals will help you stay on track with your investments strategy and prevent you from getting swayed by hot new investment trends or trying to time the market. Goal-based personal investment plans address the following:

Risk preference – The rule of thumb is the higher the risk, the higher the return, but this doesn’t apply to every investor. It’s essential to determine your risk preference to know what level of risk (and potential losses) you are comfortable with.

Asset selection – It is also known as ‘Asset Allocation.’ This strategy requires the investor to decide the percentage of the total portfolio that will be placed on each asset while balancing risk and reward.

Investment horizon – This is one of the first steps in creating a portfolio. It defines the length of time that investors expect to hold the investments depending on their income needs, risk exposure, and goals.

Being clear on how much risk you want to take, how long you want to invest for and what asset mix you want in your portfolio makes it easier for you to decide how you will invest your money and how much you will need to add to your portfolio each month to reach your long-term investment goals (such as saving for retirement or your kids’ college fund).

2. Investing Without Proper Research

Conducting thorough research on the securities you want to purchase for your portfolio is vital. Your money is your responsibility. Hence, knowing what you are investing your money into is very important. If you are investing in stocks or corporate bonds, it is important that you have insight into the companies whose securities you intend to buy. That means looking at the past performance and their predicted future performance. If conducting company research on your own is too challenging for you or you don’t want to spend your time doing it, you can read third-party research reports or blog posts on financial news publications to get a better idea of how the companies are doing.

3. Putting All Your Eggs in One Basket

Risks are inevitable when it comes to investing, but diversifying your portfolio allows you to reduce risk while maximizing returns. To diversify your portfolio, you need to invest in assets that have a negative or no correlation with one another so that if one asset class underperforms, another one still performs and reduces your losses in a market downturn.

CNET says: “Real diversification means owning multiple asset classes that behave differently in various market conditions and respond differently to various economic events.”

4. Following “Hot Tips” Instead of Making Sound Decisions

When it comes to investing, it is easy to be swayed by “hot tips” from friends who work in the financial markets. However, following hot tips is not a good investment strategy. If your financial market “expert” friend has a “sure thing” for you, then he or she knows something that is non-public information and if you trade on that information that would be insider trading, which is illegal. Even if the hot tip is not inside information, it is still not wise to put a lot of money into one single stock as long-term wealth is generated by investing in a diversified portfolio and by adding to it regularly to benefit from compound interest.

5. Not Keeping an Eye on Brokerage and Investment Management Fees

One of the easiest ways to lose out on returns is by not keeping an eye on fees. If you are being charged a 2% management fee by your investment management services provider those are 2% that you have to take off your annual returns each year. Fees can also come in the form of brokerage fees. If you trade a lot and your online brokerage account charges you a high per trade fee then you should consider to switching to a different provider that charges you less.

While Forbes recommends ways on how to drive these expenses down to a reasonable level, the Internal Revenue Service considers these fees and miscellaneous expenses as reasonable and necessary. I disagree with the IRS. Keep an eye out for these fees as they can be a serious “returns killer” in the long run!

6. Forgetting About Tax

There’s only one constant item in the investment journey – taxes. Aside from investment income taxes (dividends, interest, etc.) you also have to pay capital gains tax on your investments. Tax rates vary depending on your location and your income but you will need to keep them in mind once you decide to cash out your investment.

It also important to note that investment taxes change over time and are affected by who is in government and what policy changes they invoke. In the United Kingdom, for example, the recent decision to exit the European Union will very likely have an effect on future tax structure in the UK. FXCM said that advocates of Brexit will argue that the country will potentially reduce taxes for its citizens if the referendum is finalized. It’s important to be updated politically to know how changes in the government can affect your investment portfolio.

It also helps to consider applying for plans or accounts that offer tax advantages, such as the Individual Retirement Account (IRA) in the US and the Individual Savings Account (ISA) in the UK. These tax-efficient savings accounts are free of capital gains tax and income tax up to a certain amount per year, allowing investors to enjoy more of their hard-earned invested money.

7. Not Reviewing Your Investments on a Regular Basis

Do not let investments sit there without ever looking at them. Reviewing your portfolio regularly is necessary to ensure that you are following your strategy and that portfolio rebalancing is not needed at this point in time. That doesn’t mean you have to check it every day or even every week but especially in times of major political changes (like Brexit or elections), it would be wise to check in and see how your investments are performing.

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Alex founded SmartMoneySmartLiving.com in 2015 to empower millennials to take control of their financial future and guide them along their journey towards financial freedom.