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When you’re new at something you’re going to make mistakes. No worries. That’s how you learn! Of course, it’s pretty awesome if you can take some shortcuts to learn some lessons in advance and avoid those mistakes. And we have a shortcut for you today: the 5 biggest mistakes new investors make (and how you can avoid them!).
Pre-List Mistake: Waiting (or Neglecting) to Get Started
Before we jump into the list of mistakes new investors make, we should point out that the biggest mistake you can make is waiting to get started. The best time to start investing is yesterday, and the second best time is today. The sooner you can start, the more you can take advantage of the magic of compound interest to grow your investments while you sit on your tush.
We find that so many young women wait to start investing because they don’t know enough about it. Now, we’re not telling you to jump into an investment without any information or research, but once you have a basic understanding of some basic investment types, you can get started with some lower-risk investments and learn as you go. There are plenty of resources to help you (like us; we’re just a message away!). A good, basic overview of some newbie investments can be found here.
But seriously, if you wait, you’ll wake up in your 40’s and realize you’re completely financially-unprepared for your future. And we don’t want that to happen to you!
You can check out our post on Becoming an Investor with just $5.
Ok, so you’re definitely an investor (or will become one this week). What are the 5 biggest mistakes new investors make and how can you avoid them?
Mistake #1: Watching Your New Portfolio Too Closely
Um…shouldn’t you be watching your investments closely as a newbie? You would think so, but no, not really.
The fact is, markets go up, and they go down. Just because your investments are going down does not make them bad investments. There are so many factors at play completely out of your control, so you don’t need to be stressing about this every day.
I made this mistake when I started investing. I added all the ticker symbols to my iPhone stocks app and checked them (multiple times) daily. I’d be in a good mood when they were up and a funk when they were down. That’s no way to live your life!
And really, they usually climb over time, even when they go through short-term slumps. That’s why we recommend checking your investments just once/year. Check out last week’s post on Financial Check-Ups for more info.
Mistake #2: Allowing Yourself to Get Overwhelmed
This is a hard one to avoid because there’s just so much information out there, and it all contradicts itself. If you allow yourself to get sucked in, you’re going to throw your hands in the air, throw in the towel, wave the white flag, and give the eff up.
We’re not immune to this. Dave Ramsey gives awesome financial advice. Robert Kiyosaki gives awesome financial advice that completely contradicts Dave Ramsey. What’s a novice supposed to do when the experts can’t even agree?!
There are lots of financial strategies, and you’re allowed to take your time (as long as you’re investing in some way!) and find out what works for you. You can practice conservative stewardship with Dave or you can chase wealth with Robert. This is personal finance, people. It’s all about you and what works with your situation and your beliefs. We’ve taken some advice from Dave and some from Robert until we found our personal balances. In fact, we’re always learning from different financial gurus, picking and choosing which of their systems we’re going to accept, and which to ignore.
Check out our Top 10 Best Personal Finance Books to Change Your Life and decide which principles from which gurus you’re going to adopt.
One more piece of advice on avoiding overwhelm: strive for manageable, not optimal. You can spend every second of every day trying to maximize your returns. Gross. Or you could accept a manageable financial plan that allows you to go about your life, while your investments earn great, but not necessarily maximum returns. We’ll take those great returns any day!
Mistake #3: Investing in Individual Stocks
So we just said to go for manageable over optimal, right? Analyzing and selecting individual stocks to invest in is the exact opposite. Here’s the problem with individual stocks: they take a ton of research and analysis to select, and they can still fall at any time for reasons completely out of your control.
Chipotle is a great example. In 2012, everyone wanted Chipotle stock, driving the stock price from $243 in October, 2012 to $749 in August 2015. Then E. coli hit, and their stock imploded. In the year following the outbreak, Chipotle stock plummeted to $370. And while it’s currently up to about $416, there are no signs indicating a full recovery any time soon, if ever.
The rewards might be good, but on the whole, individual stocks are just too risky for the non-professional investor.
Your better bet is to stick to index funds. They’re basically a package of a bunch of different stocks or bonds that rise and fall with a given market index (like the S&P 500, for example). So when you invest in a share of an index fund, you’re actually investing in partial shares of tons of different companies. And if one company tanks, you have up to hundreds of other companies to pick up the slack. You don’t have all your eggs in one basket. And the financial world calls this “diversity” or “diversifying your portfolio”.
We like to diversify further by selecting multiple index funds. Many funds center around an industry or a geographical location, so if you have multiple funds covering multiple industries and economies, you’re well-diversified.
Mistake #4: Failing to Reinvest Dividends
We have to get a little technical for a sec. Bear with us here.
Dividends are basically money a company pays to its shareholders. There’s all sorts of crazy details about when dividends are payable, but that doesn’t matter for this discussion. What matters is what you do with the dividends you earn.
Dividends aren’t usually a ton of money, so unless you own a crap-ton of shares, it’s just going to be a couple bucks you’d blow on a latte. But you have the option to automatically “reinvest your dividends”, which means you’re taking those few bucks and buying a couple more shares instead. That allows your investment to grow faster without any work or real sacrifice on your end. You just need to check the box on your account that says “reinvest dividends”. Easy!
Mistake #5: Ignoring Real Estate
Rental properties are my favorite investment! Yes, they take more work than stocks and bonds and funds, but the pay-off can be incredible! And they’re more rewarding on a personal level. We even have a whole post on the 3 Reasons You Should Buy Real Estate (Even if You Don’t Want to Own Your Home).
The problem is that a lot of young women don’t even consider real estate. They decide it’s easier to be a life-long renter, and that’s it. End of discussion.
But here’s the thing: you can be a life-long renter and still invest in real estate. I’m a renter in Germany right now, but I have a few investment properties in California bringing in cash every month. And appreciating in value so I can make bank when I sell them. Especially since my renters are paying down the debt for me! Oh, and I get tax breaks.
But isn’t there a bunch of maintenance and repair expenses? Sure! Water-heater replacement, appliance repair, leak fixes. All of that is to be expected. I simply set aside a percentage of the incoming rent each month so I’ve got the money to cover the expenses as they come. And those expenses are tax write-offs.
We’re not recommending real estate investing for everyone. If you have poor credit or an iffy debt ratio, now’s not the time for you to get into real estate. But at least give it serious consideration. Don’t just ignore the incredible earning potential of rental properties.
What do you think of our list?
Did we leave out any of the biggest mistakes new investors make? Let us know in the comments.
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