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October 9, 2020

3 common mistakes new investors make—and how to avoid them

The world of investing is a tricky one. With so much advice out there on what to buy, how to sell, and where to diversify, things can get confusing. Especially when you don’t know who to listen to. That’s why we rounded up advice from expert investors on our team and scoured the internet to find out what common themes were out there when it comes to investing. Sometimes the best advice is learned and it’s just as important to know what not to do when it comes to money as what to do. So whether you’re just starting out or you’re looking to polish your investing game, here are three common mistakes to watch out for to protect your (ass)ets.

Mistake #1: Buying companies you like

We all love rooting for our favorite companies and finding trendy startups that we almost will to win. But watch out, because it’s very easy to fall into a mindset where you think that just because you like the company they’re going to perform well. Stocks don’t operate on a popularity contest and there is so much that goes into the performance of the market. It’s tempting to buy stocks solely because a company is trending on Twitter or you saw an impressive TED talk, or you overheard a colleague bragging about how many stocks they bought in the company (hoping to double profits fast). When you hear about a shiny new company, start training yourself to think like an investor. Investors ask, “is this a great company?” instead of “is this a great product?” Do your research and when you hear your coworker bragging about the new stock they bought you’ll smirk knowing that you’re the one who did the research.

Mistake #2: Checking your portfolio everyday

In virtually every aspect of life, the motto that rings true is slow and steady wins the race and the same goes for stocks. Taking a strategic approach to investing pays off. When you’re checking your stocks everyday you will 1) cause yourself unnecessary stress and 2) develop unrealistic expectations of how a stock should perform. This isn’t to say you shouldn’t rebalance your portfolio over time, but unless you’re trained in day trading, jumping in and out of stocks or staring at your portfolio on an hourly basis will drive you mad and set you up to fail. This is worth reiterating during turbulent market times. Market events like COVID-19 stir up powerful emotions like fear and can drive novice investors to abandon their long-term investment strategy. Remember, market volatility is natural. You won’t get rich overnight. Sticking to a consistent, methodical strategy will build wealth over the long-term, not putting all of your liquid funds into Tesla.

Mistake #3: Failing to diversify properly

When assessing your portfolio, you must assess the relative risk of each option in addition to its potential returns. If you sink all of your investments into five or ten stocks and they perform poorly, what happens next? Protect yourself from concentrated risk by diversifying your portfolio with a healthy spread of mutual funds, bonds, stocks, and real estate investments to boost returns and reduce risk. By and large the most critical aspect of diversifying is to avoid allocating the majority of your funds in a few areas. Think of it as betting in a horse race. You’re more likely to win if you spread your bets across ten horses instead of going all in on one. 

Verdict: Plan for the long-term 

If there’s one key takeaway it’s that making steady, sound investment decisions over time will give you the biggest returns on your money over the long-term. While it’s true that every investment carries risk, it’s also true that every investment presents opportunity. Every year you can challenge yourself to learn more, add more diversification to your portfolio, and fine-tune your personal investment strategy to ultimately grant yourself financial freedom and live the life you want.

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