Mistakes are part of learning anything new. Investing is no exception. When you’re getting started as an investor, you’re bound to make a few mistakes here and there as you figure out what you’re doing.
We thought we’d outline some of the more common pitfalls that new investors fall into. If you can avoid these, you’ll be well on your way to making investing a positive habit that you stick to for the long term.
Mistake #1: taking the short-term return
We’re big fans of investing for the long term. If you invest your money for ten years or more, you have a better shot at earning higher returns than if you invested for fewer than ten years.
While that sounds great in theory, it’s difficult in practice, especially because long-term, riskier investments tend to move around a lot in the short term.
When this happens, beginner investors may panic and sell when things take a dip (see mistake #2)—but they also might sell too early when things go up! This is called ‘timing the market’, or trying to sell when prices are high and buy when prices are low. You can read more about timing the market in this post about investing for the long term.
Here’s how it works: let’s say you invest $10, with the intention of waiting ten years to get your returns. After one year, your investment gains a lot of value, and it’s suddenly worth $15! You’re nine years early, but you’ve made a 50% return, so you sell.
This might feel great, but if you do this, you’re potentially giving up even higher returns in the future. If your $15 continues to increase in value by an average of 5% a year, it’ll be worth $22. If you’d just stuck to your long-term time horizon, you would have made another $7.
Now imagine that you’d invested $100, $1,000 or more—suddenly, your fast buck is costing you some pretty serious money.
How to avoid this mistake
Choose a time horizon, preferably nice and far in the future—and stick to it, no matter what happens! If you don’t need the money, there aren’t too many reasons to sell early, regardless of whether your investment has gained or lost value...