Whenever you do anything for the first time, you’re apt to make mistakes and experience a learning curve. Whether it’s playing a sport or speaking a foreign language, you’ll probably say or do something that more experienced people wouldn’t. That’s okay – it’s part of the fun and challenge of learning something new.
When it comes to money, though, people get nervous. And that’s understandable, because no one wants to make a mistake that leads to a loss of money. In the hopes of flattening your learning curve, here are some of the top mistakes new investors make.
Not educating yourself
Many people think learning about finance and investing is boring. But like anything else, financial education can put you to sleep or propel you on to learn more. One key is to start at your level. There are lots of financial education websites, magazines, and books out there to help you.
Don’t be surprised though if you hear different advice. Buy stocks. Don’t buy individual stocks. Invest only in index funds. Use actively traded funds to boost your portfolio. Each of those statements can be true in certain situations. Before you can decide which advice to follow, you need a basic understanding of what it all means.
The Wealthy Barber. This book, originally published in 1989, is written in the style of a novel, following several friends as they make decisions about their financial future. Since it’s written as a novel, it’s very easy for someone with no financial knowledge to follow. The Wealthy Barber provides a good framework for a new investor to learn the basics before moving on to more complex or focused works.
Note – this book provides a good outline, but some of the suggestions that might have been appropriate in the 80s are not as common today. I wavered on recommending it – but it’s a great tool for a non-financial person to get their feet wet.
Others to consider: Get a Financial Life or I Will Teach You to be Rich.
Kiplinger’s Personal Finance. Published monthly, Kiplinger’s covers topics from buying a house or car to investing to health care and travel. One of their claims to fame is that it was the first magazine to provide financial advice to the American public. Some article topics (like a recent one on trading options) may be over beginner’s heads, but this magazine will help you go from newbie to a more educated investor.
Others to consider: Barron’s or Forbes.
Your retirement plan provider. If you have a retirement plan through work, you should also be receiving information about your investments, including the differences among investment options and how you might want to allocate your retirement money. The plan provider should also hold regular meetings where employees can ask more specific questions. Take advantage of these.
Once you’re feeling more comfortable with the basics, continue your education. If you do an internet search for “the ten best financial planning books” you’ll find lots of articles. Look for books that are common among the different articles and read them. Some are awful – I picked up a book over the summer that bored me after 20 pages. Some have left-field advice. Only by trying them on can you see what works best for you.
Where do I invest?
Here’s the conundrum. If you’re 22 and just out of college, you might be starting a job where they want you to decide how to invest your retirement contributions. If you don’t make a choice, many companies will put your money into a money market fund, which is probably not the vehicle a 22-year-old should use to save for retirement. But if you don’t know enough, you could be more scared of making a mistake than making a choice.
If you know nothing about investing, some financial advisors recommend you start with broad index funds or target date funds. But don’t just mindlessly add money to this account and not revisit where you’ve invested. Learn about your options, then go back in and update your current balance and ongoing investment allocation.
I’ll wait a few years
More concerning than not making a decision on the fund is making the decision not to invest at all. You have something your parents (and anyone older) doesn’t have – time. One oft-repeated chart shows that an investor who starts at 25 and invests for 10 years – then stops – will have more at retirement than one who starts at 35 and invests the same amount every year (with the same return) for 30 years.
Plus, starting early gives you time to overcome any initial mistakes. It’s best not to have a lot of mistakes. It’s second best to make them early!
Flavor of the month
When you start investing, it’s easy to rely on a trusted friend for advice. Perhaps one is into small-cap stocks and suggests an index fund that closely tracks the Russell 2000. Another friend is hot on tech. And yet another thinks investing in bonds is the best idea ever. The problem you’ll run into by following their investing suggestions is that you’ll end up with a mishmash of investments with no thought to where YOU want to be.
Develop a plan for your investments. It can be as simple as I’m going to save up to the match at work and then another 5% on top of it in a Roth IRA. I’ll invest in mid-cap stock index funds for both. This certainly isn’t advice, and investing only in mid-cap funds might be a path to riches or the poorhouse. The key is to develop a plan that makes sense for you, and stick to it.
Ignoring fees
Mutual fund fees, stock trading fees… companies are in the business to make money and will happily take more of yours if you aren’t careful. Become a fee hawk – if a fund is too expensive, look for cheaper alternatives. If your online stock broker charges for OTC stocks and you want to invest in one, find a broker that doesn’t. Don’t accept paying a dollar more than you must to invest.
Not questioning your advisors
We’re all busy. With work following us everywhere thanks to being constantly in contact, you might think there’s never time to breathe, much less learn about money management. And a well-chosen financial advisor can be worth their weight in gold. But even if you pick the best advisor, you still need to know what she’s talking about.
When you meet with your advisor, have them explain what they are doing and why. Make sure they are looking out for your best interests. If you don’t feel comfortable with something they are doing, ask them to provide alternatives. Remember, you are paying for this advice. You need to understand everything that’s going on with your money.
Not expecting the market drop
Markets go up; markets go down. It’s happened, and it’s going to happen again. The plunge can be as stomach-churning as the first hill on a huge roller coaster.
If you haven’t lived through your retirement fund being chopped by 30% or more, you probably will. And while people can say you have to be willing to stay invested or you need to understand your risk tolerance, until you’ve lived through it you really can’t predict how you may react.
If you’re betting on an economy to do well over time, there are a lot worse out there than the US economy. Just know that stuff happens. No one could have predicted COVID. It certainly sent shock waves through the world economy. There will be wars, stupid economic policy, and perhaps even another pandemic. But there will also be times of peace and long periods where it seems everyone is making money.
Thinking you’ve learned it all
Investing is a lifelong education. What’s good for you at 20 isn’t the same as what’s good for you in your 60s. Investing to build up an IRA is very different from learning how to pull money out of an IRA. Take the time to educate yourself. Ask for professional help when you need it. But keep learning: that’s one of the best ways to avoid mistakes.
Photo by George Becker