Beginner investor mistakes can be costly. If you’re totally green when it comes to investing, one of the smartest things you can do is learn from the mistakes other beginners have made.
I want to share with you some of the really common pitfalls newbie investors face and how you can avoid them. You’re future self will thank you for paying close attention to this lesson! Think of the money that this will save you, I’m excited for you.
Start without having a clear goal and timeline
You’re excited to get started investing……awesome!
But hold on just a minute. Before you make that first transaction there’s something you MUST do first.
Set your financial goals.
Goal setting is a critical starting point for all beginner investors. What are your financial goals and aspirations? How does investing help you meet them? Keep in mind the time frame you want for these goals; your investment strategy for short term goals will be different from your long term targets.
A few common financial goals include:
Short term (5 years)
Buying your first home
A 6-month sabbatical overseas
Mid range (10 years)
Saving for the kid’s university fees
Becoming completely debt free (yes, it IS possible!)
Long term (20+ years)
Wealth creation for your dream retirement
Define your goals with emotion.
“I will save 10% of my income this year” doesn’t really sound like a super motivating goal, does it?
“I will save $80 a week for 12 months to take my family on a road trip around New Zealand!’
See, that’s much more exciting!
Super charge your goals with emotion and get excited about the plan you’re creating to meet them. Successful investment strategies are guided by well thought out goals and realistic time frames.
Investing while you still have a lot of high-interest credit card debt
It’s important to have other parts of your financial life in order before you get started with investing. This includes wiping out any credit card debt you’re currently holding.
If you’re deep in credit card debt, paying 18% – 19% interest annually on a big balance will cancel out any gains made by your portfolio. It’s smarter to smash any high-interest consumer debt you have first then take the money you were putting towards repayments to your investments instead!
It’s also a good idea to have an emergency fund ready for any money curveballs life may throw. A minimum of one months living expenses is a good start. Having the cushion means you won’t need to resort to selling investments off to get you out of a financial emergency like medical expenses or unexpected car maintenance.
Investing in an industry you know nothing about
Billionaire investor Warren Buffet talks about the ‘circle of competence’ as a guide to making smart long-range investing decisions.
The circle of competence is essentially the types of businesses an investor is familiar with and understands. The idea is to use your circle of competence to guide your investment choices, whether your a total newbie or a seasoned investor.
Why? By investing in a company or industry you’re familiar with, you’re more capable of assessing the competitive climate and a company’s strengths and weaknesses, etc.
If you’ve worked in the software industry for a decade, you’ll likely have a solid understanding of the industry and businesses and products that perform well. On the flip side, if you know nothing about software, you’ll be going into an investment slightly handcuffed unless you’re prepared to heavily research the industry.
Your circle of competence might be small, and that’s ok. It’s better to stick with industries you are familiar with then wander too far into the land of speculation.
Beginner Investor Trap: Not diversifying
Putting all your investment eggs in one basket means you’ll have less room for error if the market takes a turn. If the stock or industry you’re heavily invested in dives, so will the value of most of your portfolio.
Instead, spread your investments across a mix of different ‘asset classes’.
An asset class (or asset category) is a group of similar types of investments, for example – cash, real estate, stocks. These asset classes are divided into two types:
Growth Assets – Potential for higher returns but carry more risk
Defensive Assets – Lower risk but usually lower returns than growth assets
I talk more about diversification, basics of asset allocation and provide an example of what a diversified portfolio might look like in this post.
Losing your cool
“Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.” – Warren Buffet
The most successful investors check their emotions at the door. They have patience and keep their eyes on the long game, tuning out media noise and hype by financial ‘gurus’.
I know keeping your cool is easier said than done especially if you’ve just made your first $5,000 or $10,000 investment.
Here are my tips to avoid sleepless nights or making emotionally charged decisions –
Step away from the internet – Don’t go clicking around the internet reading every update of an impending financial crash.
Delete any apps that send you notifications of day to day stock prices
Don’t try and time the market
Buy to hold for the long term.
Regularly check in to remind yourself of your long term financial goals We all start out as beginners. Don’t let the fear of investing stop you getting started. If you’ve got no idea where to begin, let me guide you through the process. Investing Bootcamp opens again in the next few weeks, so keep an eye on your inbox.