When you first start investing, it’s easy to get caught up in the daily rollercoaster of the stock market or to give into your urge to “beat” the market by trading stocks on your own. However, study after study shows that the majority of investors would be best served by investing their money into plain vanilla index funds and then leaving them alone for the duration.
Of course, not everyone follows this advice, which leads us to our top five most common and preventable investment mistakes:
- Trying to Beat the Market
We all have beautiful visions in our heads of picking that magical stock that will suddenly surge 1,500% the week after we invest our life savings into it. Unfortunately, such jumps happen rarely, and for every stock that rockets into the atmosphere, many more tank. As investors know, past performance does not predict future performance. If you chase after hot stocks, you’re more likely to catch them at the height of their value rather than at the moment before they surge.
- Investing on Emotion
It’s easy to invest when the stock market is booming and consumer confidence is high. No matter how many times we hear the sage advice, “buy low, sell high,” it is extremely difficult to watch our portfolios sink or to invest into a losing market. When we make investment decisions based on emotion, we’re almost certain to buy high and pull our investments out toward the bottom of the market. It’s always better to ride the waves, especially if your investment horizon is a long one. (Is Fear Running Your Investment Strategy? Find out.)
- Not Investing Early Enough
Though we can’t predict what will happen tomorrow, so far, the stock market has shown itself to be a good investment bet…in the long term. Day to day, or even year to year, the stock market can drop significantly as we saw with the recent Great Recession. The earlier you invest, the more time your investment has to ride the ups and downs of the market and to grow through the power of compound interest. (Learn how Patience is a Virtue when it comes to investing.)
- Investing Too Conservatively
The Great Recession turned a lot of people off of the stock market, but low-yield savings accounts and bonds aren’t even keeping up with inflation. If you put your money into a savings account for a decade, you’ll come out the other end poorer than you started due to inflation. If you have a long-term or even medium-term investment window, then invest at least a portion of your money in a diversified mix of funds that includes riskier options that can bring you a higher return.
- Not Understanding How Your Financial Advisor Earns Income
Most financial advisors earn a living in one of three ways. Fee-only advisors are paid by you for the advice they give, and don’t receive commissions from selling financial products such as stocks, mutual funds, annuities or life insurance. Fee-based advisors earn fees from advice they give, and they may also earn commissions on some of the products they sell. Commission-based advisors are paid commissions and fees from the products they sell.
What you pay depends on the compensation structure of the advisor, what types of services you need and how much money they manage for you. Don’t be shy about asking how your advisor is compensated and how much you’ll pay. It’s vital to know how your advisor makes their money and identify any potential conflicts of interest.