How to Be a Bad Investor: A Guide to Avoiding Investment Mistakes
Investing isn’t hard - it’s only scary because we were never taught how to do it! However, there are things that you can actively do to be a bad investor. Unfortunately these are things that a lot of people do, so make sure you don’t get caught up in these habits! By learning what not to do, you'll be better equipped to navigate the world of investing and make smarter financial decisions.
Is Investing Hard?
Investing doesn't have to be a complicated or intimidating endeavor. Anyone can become a successful investor. The key lies in understanding the basic principles and avoiding common pitfalls that trip up new investors.
Investing Mistakes to Avoid
Even though investing is much easier and more fool-proof than we’re often led to believe, there are some crucial investing mistakes you want to avoid.
Trying to Time the Market
The most experienced investors have no way to “beat” the market, so don’t kid yourself into thinking there’s some magical formula for getting it just right. Instead of trying to buy low and sell high and get the timing just right, let’s keep it simple. Buy and hold index funds.
Waiting to Invest
Tick-tock! Time is money, and the more time we spend waiting for the ✨perfect✨ moment, the more potential gains we're missing out on.
I think waiting to invest is the single greatest mistake any investor can make.
You cannot get time back! Start investing now, even if it’s just a little. Future you will thank you!
Investing with Emotion
Fear and financial insecurity are not the best investment advisors. Stay calm, conduct solid research, and make informed decisions without letting emotions take the wheel.
The market will go up and down. Resist the temptation to panic sell. In fact, during a downturn in the market, you may want to buy even more because it’s more bang for your buck! It’s like the stock market is on clearance (and who doesn’t love a good sale). Would you ever walk into Lululemon, see those leggings you’ve been wanting on sale and be like “Nah, I’ll wait until they’re full price again.” You would never! Lean into the ebbs and flows of the market and remember: you’re a long-term investor, not a day trader; your money will continue to grow throughout the duration of its investment.
Paying High Fees
Don’t watch your hard-earned money slip away due to high fees. Seek out low-cost investment options like low-cost index funds that can outperform those flashy high-fee alternatives.
Target an expense ratio of less than .25% — the lower the better. Even 1% can equate to hundreds of thousands of dollars over time. Keep that money in your investment accounts, not in the pockets of big corporations.
Investing in Something Random Because Someone Told You To
Your cousin Devon who’s spent 200 hours “researching” a new NFT on Youtube and has cornered you at family Christmas to tell you all about why you need to be buying some too has good intentions, but investing in something random just because someone told you to is never a good idea. Sorry, Devon.
Take control of your own finances. It’s okay to listen to what others are finding to be good investments, but we must conduct our own research, and make informed choices that align with our investment goals.
When it comes to investing, like with most things in life, if it sounds too good to be true, it probably is.
Impatience
Rome wasn't built in a day, and neither is a solid investment portfolio. This isn’t a get-rich-quick scheme. We're in it for the long haul, so let's embrace patience and watch our investments grow.
Not Knowing Your Risk Tolerance
By taking the time to assess your risk tolerance objectively, you gain clarity on how much market volatility you can comfortably handle. It's like having a clear roadmap that helps you stay on track during market fluctuations. This self-awareness allows you to make investment choices that align with your risk comfort level, ensuring you can confidently navigate the investment landscape.
I’ve been investing for a while now, and I’ve seen first-hand the balance of my investment accounts rise and fall as the economy works itself out, so my risk tolerance may be higher than yours, especially if you’re just starting out. However, even though I’ve come a long way in my journey to financial independence, learned a lot, and have set myself up to be pretty financially comfortable, I still have a nagging fear that someday I’ll just run out of money. You may not feel that way and so your risk tolerance may be way higher than mine.
Whatever your risk tolerance is, it doesn’t matter. What matters is knowing yourself, not yourself compared to someone else, and not how risk tolerant you think you should be.
Pause for a moment and honestly evaluate how much risk you are really willing and able to take. Armed with this understanding, you can approach investing with a sense of confidence and make strategic decisions based on our individual risk preferences. And if you’re extra nervous - just don’t look at the account during economic downturns. That can work too!
Neglecting to Diversify
Imagine putting all our eggs in one basket. If that basket breaks, we're left with a mess! That's why diversification is key. We want to spread our investments across different classes, industries, and regions to reduce risk and increase our chances of success.
5 Things All Good Investors Do
So now that you know what not to do, what are some things you can do to be a good investor? Check out these 5 things all good investors do.
1) Set Clear Financial Goals
Successful investors know what they want to achieve and set clear financial goals. When you start by identifying your objectives, whether it's saving for retirement, buying a house, or funding your children's education, you can align your investment strategy accordingly. By knowing what you're working towards, you can make informed decisions and stay consistent on your path to financial freedom.
2) Educate Themselves
Knowledge is power when it comes to investing. Like I said before, investing feels impossible only because we were never taught how to do it.
We’re in control of our own financial literacy. Ignorance is a choice. Choose to be educated!
Good investors take the time to educate themselves about different investment options, markets, and concepts. They stay informed and up to date and know that a certified tax professional is their BFF. You don’t need to know everything to be a good investor. Learning a little everyday adds up!
3) Practice Patience
Good investors understand that investing is a long-term endeavor. They don't panic when markets fluctuate or chase short-term gains. Patience allows your investments to grow and compound over time, taking advantage of the power of compounding returns.
4) Consistently Save and Invest
Regularly saving and investing is a habit that all good investors cultivate. They understand the importance of consistent contributions to their investment portfolios, whether it's through automated monthly investments or disciplined savings habits. Even if it’s only a small amount of money, good investors know it’ll pay off in the long term to invest that money now.
5) Embrace Risk
Good investors know the importance of embracing risk while understanding their tolerance for it. Diversification of your portfolio is an important way to mitigate risk in an unpredictable market while maximizing your return on investment.
Wrapping Up
Investing is a powerful tool for achieving financial freedom, but it's crucial to avoid common investment mistakes. By conducting thorough research, managing emotions, diversifying investments, avoiding trends, and understanding your mentality around money and goals for investing, you can increase your chances of success as an investor.
Remember, investing is a lifelong journey of learning and growing. By following the principles of setting clear financial goals, educating yourself, practicing patience, and consistently saving and investing, you can navigate the investing landscape with confidence.
Ready to take the next step in your investment journey? I invite you to sign up for my free investing class. As part of my free investing course, you'll have the opportunity to watch me invest $1 live, and gain insights into my investment decisions and strategies.