How To Invest Without Making Beginner’s Mistakes
Investing is an essential part of financial planning simply because the average person's salary alone isn't going to be enough to meet long-term financial needs. Your wages may meet your current needs well enough, with even a bit leftover to put away for a rainy day. However, the money you save from your paychecks and deposit in your savings account isn't likely cover your student loan payments, a down payment on a home, putting children through college and your retirement.
Savings account interest rates aren't even high enough to keep up with inflation these days, and that's not likely to change anytime soon. That means that not only does the money in your savings account not grow in value from accrued interest over time, but also that it doesn't even retain its original purchasing power. Just sitting there, that money depreciates. To actually grow your money, you have to achieve a rate of return that is higher than the annual rate of inflation.
Learning how to manage your money and make it work for you through investment is your best chance at meeting your long-term financial needs and achieving financial security. However, for people without investing knowledge and experience, the investment world can be intimidating. Not understanding investment processes, instruments and options, many people are unsure of how to begin and worry about making costly mistakes. That, in fact, contributes to one of the most common beginner's mistakes.
Start Now, Don't Procrastinate
The results of not starting to invest soon enough have been making big headlines as the Baby Boomer generation moves into retirement age. Almost 40 percent of the Baby Boom generation have no retirement savings at all. As this largest generation leaves the workforce, many will be forced to struggle to meet their most basic needs. It is increasingly common to find people working far past retirement age simply because they really need the money. It is a huge mistake to let time drift by without investing in your future.
Early investing is an important financial strategy. Time is your friend in the investment world. You are going to make the occasional mistake. The market has its ups and downs. If you start serious financial planning and investing when you enter the workforce, you have time to recover from investing mishaps and market downturns. You have time to implement a strategic approach, making your higher risk and higher yield investments during your prime earning years while diversifying your overall portfolio, then gradually shifting over to lower risk investments as you approach retirement age.
Understand Time in Relation To Investing
This mistake also has to do with time. Many people confuse speculation with investing. Investing produces yields over time. The successful investor understands that. Every now and then, an investment may produce quick, high rate returns, but that is not the norm. That's why market fluctuations are not the same anxiety producing events to an experienced stock investor that they are to some beginner investors. Those with experience are concerned more with long-term performance rates than short-term ups and downs.
Not seeing investment as a longer term process leads to the potential to make other classic beginner mistakes, such as being impatient about return on investment (ROI), chasing returns, making an excessive number of trades and letting fees eat up earnings, and allowing investing to degenerate into speculation, making short-term, high risk bets on the performance of a stock or other financial instrument or opportunity.
Chasing returns can lead to failure because people typically chase what they think are hot stocks or jump on the bandwagon of trending investment fads hoping to make big money instead of making carefully researched solid investments. Once something has become popular enough to be a trend or fad, odds are that it is reaching its peak anyway and will start heading back down before too long. It takes a lot of experience to time such movements and even for highly experienced investors, those sorts of timing based investments are anything but sure. A quick descent can devastate earnings.
Develop A Clear Financial Plan
Failing to have a clear, detailed financial plan is a major error that many beginners make. Having a clear, well thought out financial plan prevents haphazard investments and poorly allocated investment portfolios. With a good financial plan, you know what you need to do and understand when, why and how to do those things. You have well defined entrance and exit strategies for your investments. You know when and under what conditions you are going to buy or sell, such as with stocks, real estate and similar investment types, and when and why to increase or decrease your investment in 401 (k) plans, money market accounts and related investments.
Understanding the why of your financial goals and investment moves can help you to make better short-term and long-term financial choices. Timing matters for things like buying a home, saving to send children to college and funding your retirement years. A classic timing mistake is to neglect investing and saving for retirement in favor of focusing financial efforts on putting children through college. Often people don't max out their 401 (k) contributions and lose out on free money – employer contributions. Retirement planning should be continuous. Don't neglect it.
Working with a professional financial planner is a good way to develop a detailed financial plan, as long as you avoid the mistake of not doing your due diligence when choosing your financial planner. Research is important. Comparison shop just like you would for anything else important to you. A planner can help you craft a detailed financial plan gets into the nitty-gritty of the numbers. You'll calculate your financial needs for various phases of life, straight through your retirement years.
From those figures, you and your planner can create a viable spending plan, set realistic savings goals and plan life-stage appropriate investment strategies, including portfolio diversity and balance. Diversity is important because with a diverse enough portfolio, lackluster performance in one area tends to be covered or balanced out by better performance in another.
A good plan protects you from many types of investment errors. Part of making that plan is to do your homework thoroughly so that you fully understand the mechanics of your investments. It's not as difficult as you think and gets easier with experience and confidence. It is the mark of a rank amateur to invest in things you don't understand. That can be a very costly mistake, in terms of both money and time.
Other Beginner's Mistakes To Avoid
Panic selling and other emotion-based actions are mistakes that a solid financial plan helps to protect you from making. You've invested time, energy and, if you used a professional financial planner, money into your plan, so use it. Stick to it. If you think life or market circumstances require a change of course, consult with your financial professional before making major changes. Get a second or third opinion, just like you would with a doctor if you had a serious health concern.
Don't invest with borrowed money. You'd think that would be clear from what happened during the run-up to the Great Depression, but no, not so much. People and even financial institutions that should know better did exactly that in the run-up to our recent Great Recession and our global economy is still staggering beneath the weight of the consequences of such unwise investment behavior.
Another beginning investor's mistake is to neglect cash reserves. It is important to keep a liquid – not tied up in investments – fund available for emergencies. Aim to have at least three months of living expenses, better six months, saved. That way an unexpected job loss or loss of work time due to sickness or injury isn't a devastating financial blow. You'll have a cushion and some time to work out other options.
Fear Of Making Mistakes
One of the most damaging investment errors is to allow the fear of making mistakes to prevent you from making the sort of investments that can protect your future and lead you to financial security. The recently released BlackRock 2015 Annual Global Investor Pulse Survey found that many Americans hold 65 percent of their net worth not in investments capable of producing the sort of returns they'll need to fund retirement, but in cash instruments that will be whittled away by poor interest rates and inflation and are fundamentally unable to yield adequate returns for their retirement income needs. That same survey found that fear of making mistakes and losing money is a major cause of that sort of cash holding behavior.
That fear of loss leads many to make the mistake of not investing at all. Don't be that person. As a beginning investor, while research, careful planning and education can prevent many mistakes, you are still going to make a few, just like seasoned investors do. Any investment you make has an element of risk, so accept that, as a beginning investor and later on as an experienced investor, you will lose money on occasion. And, that's okay. Mistakes and losses can be valuable teachers, helping to you to further develop the skills you need to achieve long-term financial security.