Investing is one of the first steps on that well-trodden path to a comfortable financial future, but investors can lose and win along the way.
Pitfalls lurk along the road to wealth and good fortune; sometimes, the markets go against you despite your best endeavours.
Although some factors that buffet your plans are unavoidable, many results from investor mistakes.
Here at iExpats, we’re out to help you make money rather than lose it, so here’s our guide to some of the most common investing errors.
Table of contents
- Buying Hot Stocks Due To FOMO
- Fame Doesn’t Always Mean Fortune
- Don’t Panic!
- Cash Is Not Always King
- Forget Trying To Time Deals
- Don’t Ignore Your Investments
- What Are Your Stock Options?
- Don’t Invest Without A Reason
- Review Your Portfolio
- Consider Estate Planning
- Beating Your Bias
- Counting The Cost Of Investing
- The Bottom Line
- 12 Common Mistakes Investors Make FAQ
- Related Information
Buying Hot Stocks Due To FOMO
Fear of missing out is a big driver for investors keen to make money – but prices can rise and fall for other than investment reasons. Cryptocurrency is notorious for moving up and down in line with social media gossip rather than sound financial reasoning.
Some investors say if you’re jumping on the gravy train, you are already too late to market and will lose money when the loco hits the buffers.
Fame Doesn’t Always Mean Fortune
A lot of investments trade on their branding or a social media frenzy. Take Elon Musk and the price of Tesla stock or his influence on the value of cryptocurrency dogecoin. Their values rise and fall as Musk tweets.
But before following Tesla, Apple, Facebook or any other well-known stock, understand why you are investing rather than following the crowd.
Investing is more of a rollercoaster than a smooth ride. Good assets can lose their shine and shed value by the minute, but that doesn’t mean bailing out as soon as possible. Investments may have a bad time, but selling in a panic can lead to other problems.
Panic selling locks in losses and impacts future profits if the investment rises.
Cash Is Not Always King
Money stashed in a high-yield savings account is unlikely to earn as much as property, stocks, shares, or bonds. By all means, hold some rainy-day cash to cover the bills if you are ill or lose your job, but inflation eats into cash, and generally, it’s better to invest than save.
Conversely, don’t invest cash you need to spend because investing and cashing in quickly costs money and leaves little time to make a gain.
Forget Trying To Time Deals
Hanging on for the right time for a deal is a waste of effort. Investors can never second guess when an asset price is likely to rise and fall and by how much. The best way to tackle timing is to invest for the medium to long term, so time evens out gains and losses.
Taking a stake in a tracker fund is often the best long-term investment method.
Don’t Ignore Your Investments
Setting up a portfolio and hoping for the best doesn’t work. You need to monitor asset allocation – the amount of money invested in different types of investments. The global economy and markets change over time, so what was good asset allocation a decade ago may be riddled with losses today, especially if you want to plan for retirement with fewer risky investments.
What Are Your Stock Options?
Your employer may offer stock options, but be wary about accepting. Taking too much of a single company’s stock can distort a portfolio’s balance, and if the company should go bust, the hit on your portfolio can be high-risk.
Always invest with diversification in mind.
Don’t Invest Without A Reason
Consider why you want to invest – and review your investment goals regularly, as they will change as you move through different life stages.
You need an investment objective to adjust your saving habits to meet the goal. The objective could be to retire at 55 years old, see children through university, pay for their weddings, or a mix of several goals.
Review Your Portfolio
Managing a portfolio isn’t a daily task, but something investors should look at regularly – maybe every year or so. Don’t underestimate your future financial needs – aiming high and having too much is better than falling short.
Don’t confuse income with cash flow. Cash flow is what you need to pay the bills, while income is the money you earn from various sources.
Consider Estate Planning
Unfortunately, none of us lives forever, and although most people live long lives, the worst can happen anytime. That’s why sensible investors – especially those married with children – write a will and think carefully about who inherits their investments.
Beating Your Bias
Remembering successes and downplaying failures are natural for humans. Bias clouds judgement and closes the door on possible profits. Try looking at why things have gone wrong and eliminating the mistakes. Make decisions based on reliable data and impartial analysis rather than go with your gut.
Counting The Cost Of Investing
Always pin down the costs and fees relating to investment and factor them into your profit and loss account. Even low-cost accounts come with a price; often, small investors pay a higher price than those buying and selling in bulk. For instance, working with a wealth advisor can cost up to three per cent of their portfolio value each year.
The Bottom Line
The takeaway is there is a lot more to becoming a successful investor than picking stocks.
Investors need to monitor the markets, costs and the global economy while monitoring portfolio diversification.
Being honest with yourself and learning from mistakes improves the chances of investing in success.
12 Common Mistakes Investors Make FAQ
An asset class is a group of investments with similar characteristics that are regulated by the same rules. Cash, stocks and shares, property, bonds, gold, and cryptocurrency are common asset classes.
Asset allocation is splitting investments between different asset classes. The proportions will change depending on where you are in your life journey – for example, you can take more risks when you are younger as you have more time than someone approaching retirement to repair any damage from investment losses.
The answer depends on your financial means, although many advisers suggest the 50\30\20 rule. This rule demands you spend 50 per cent of your earnings on needs, like food and housing costs, 30 per cent on wants, or life’s luxuries, and save 20 per cent.
Yes, saving and investing are different. Savings is setting money aside for future use and financial emergencies. Investing is making your money work for you over the long term – 10 to 15 years – by growing in value.
Investments grow in value because of the power of compounding.
For example, Amanda invests £3,000 a year for 40 years and receives an average annual return of six per cent. After 40 years, her portfolio is worth £492,143 – £372,143 from earnings and the original investment of £120,000 (£3,000 x 40). Earnings would include interest and dividends.
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