Don’t Make These Mistakes: Experts Reveal What Not to Do When Investing
If you’re going to invest some money, be smart and prudent about it.
On the other hand, don’t be a chicken, either. Don’t be afraid of the stock market.
That’s the message we got when we asked a panel of eight financial advisors to name the investing mistakes they most frequently encounter.
So that got us wondering: What do these financial experts see people doing wrong when it comes to investing money?
Here’s how they answered the question: What’s the most common mistake that investors make?
Financial Advisers Sound Off on Investing Mistakes
On Waiting Too Long
The number one mistake I think young investors make is, they wait to save and invest, because they think they have low wages and high expenses and have plenty of time to save.
Young investors need to understand that even if their wages will rise, their expenses will rise more as they acquire houses, children, etc. Even more important is the impact of compounding returns over a long period of time. In essence, the most valuable money they will ever save is the FIRST money they save, as it has 30-40 years to compound!
— Karen Lee, president, Karen Lee & Associates, Atlanta, Georgia
Penny Hoarder tip: One way to start investing early is to use an app like Acorns. Once you connect it to a debit or credit card, it rounds your purchases up to the nearest dollar and funnels your digital change into a savings or investment account. Because the money comes out in increments of less than $1, you’re less likely to feel an impact in your bank account.
On Not Getting Started
The most common mistake is not starting. Many people wait until the “perfect” time, trying to time the market before investing.
These people should take comfort in the fact that, over the long term it’s time in the market that matters, not “timing the market.”
Another mistake is “Get Rich Thinking” — taking a very large position in one stock in an attempt to get rich quickly. It takes time for the magic of compounding to work.
— Ben Westerman, senior vice president, HM Capital Management, St. Louis
Penny Hoarder tip: It does take time for compounding interest to make its magic. You’ll see this happen in your 401(k) account, if you have one. An online robo-advisor like Blooom can help manage and optimize your 401(k) for you because, chances are, it can probably be doing more for your retirement.
On Waiting Until the Stock Market is Supposedly “Safe”
Don’t wait until you think the market is “safe.” If you’re a novice investor, you can’t possibly have the time, resources or ability to know when the market is safe. Entire departments of full-time workers in the finance world are dedicated to predicting when the market is “safe” and when it’s “not safe.” They are often wrong.
You just can’t afford to miss out on upswings in the market. Want proof? Missing the 10 best days in the stock market from 1993 to 2013 would take your return down from 9.2% to 5.4%. That means it’s possible, in two decades of time in the stock market, for over 40% of the growth to happen on 0.28% of the days the market is open. Are you really going to risk being on the sidelines because you’re waiting for it to be “safe”?
Another mistake is not knowing the expenses of your investment. Beginning investors can be prone to going to their bank or a commissions-based financial advisor, where they are likely to be sold mutual funds and brokerage products with a hefty commission upfront.
— Justin Chidester, owner of Wealth Mode Financial Planning in Logan, Utah
On Investing Only in Companies They Know and Like
Mistakes beginning investors make:
- Holding too much cash relative to their net worth vs. investing in the financial markets
- Investing only in companies that they know and/or like — i.e., Apple, Google, Whole Foods, Nike, etc.
- Investing too heavily in employer’s company stock — failing to understand the risk of concentration in a single company and the additional risk of being employed there
— James M. Matthews, managing director of Blueprint, a financial planning firm in Charlotte, N.C.
On Investing in Individual Stocks
Investing in individual stocks as opposed to buying a mutual fund or exchange traded fund (ETF). The average beginning investor does not generally have a deep knowledge of financial markets and rarely conducts in-depth research into the company stock being purchased. Relying upon news stories or anecdotes from friends to make buying decisions is often a recipe for failure — or certainly under-performance.
Funds — whether mutual funds or ETFs — enable a beginning investor to own a well-diversified portfolio of stocks. ETFs are particularly useful as an investor can begin buying shares at a very low initial investment.
— Kevin Gahagan, chief investment officer, Mosaic Financial Partners, San Francisco
Penny Hoarder tip: Stash, a super basic investing app, automatically pulls a few bucks from your checking account each week. It invests your money in a set of portfolios reflecting your beliefs, interests and goals. Most of Stash’s investments are in ETFs.
On Taking Stock Tips
We don’t recommend taking stock tips. First, why would you think the person giving the tip really knows more than you do? If they’ve done original research and believe they have a special insight, that’s one thing. But if they’re repeating something they heard elsewhere, that’s much less valuable.
As we say around the office, “How likely is it that someone in the middle of the country knows something that people on Wall Street don’t?’”
Also, why would the person with the tip want to share it? Maybe they’re just naturally generous but maybe there’s something a bit more sinister going on. Maybe they already own the stock and want to build a market so there’ll be more interested buyers when they want to sell.
— Warren A. Ward, WWA Planning & Investments, Columbus, Indiana
More on Taking Stock Tips
Taking a hot stock tip is a lot like playing the lottery. Instinctively, we know it’s not a good idea and we probably won’t win. But the exciting potential of a big payout is often hard to overcome, so we do it anyway. Everything is fine in moderation as long as you don’t bet the farm on a possibility.
— Andy Yadro, financial planner with Googins Advisors in Madison, Wisconsin
On Following the Crowd
The largest mistake retail investors make is following the crowd. They always get in late, after all the hype. Their entry point is poorly timed, and they give little thought to how the investment actually fits into their long-term financial plan.
— Joshua Scheinker, executive vice president of Scheinker Wealth Advisors of Janney Montgomery Scott, Baltimore, Maryland
Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder. He is an expert at making mistakes.
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This article contains general information and explains options you may have, but it is not intended to be investment advice or a personal recommendation. We can't personalize articles for our readers, so your situation may vary from the one discussed here. Please seek a licensed professional for tax advice, legal advice, financial planning advice or investment advice.