If you’re considering dipping your toes into the investment market for the first time in 2020, you’re probably searching for as much advice as you can possibly get. With the economy changing on what seems like an hourly basis and so much uncertainty happening around the world, investing may feel riskier than ever.
However, looking at the context of your personal finances in combination with the market could mean that there’s no time like the present to take the plunge. But before you do, it’s likely in your best interest to learn about some investment best practices and common mistakes to avoid.
To help you take on this journey with flying colors, we’re clueing you into some of the most common investing mistakes newbie and inexperienced investors commit. Read on to learn about how you can identify these errors and avoid making the mistakes of investors’ past.
Failing to follow a budget
Deciding to jump into the investment market is a serious financial commitment to make, requiring a substantial amount of planning and saving. If you determine that you’re ready to start making investments, you’ll want to be careful about how much you’re committing to your investment budget — after all, you don’t ever want to risk more than you can afford.
The amount that you decide to invest entirely depends on your personal finances, investment goals, and the type of investment that you plan on doing. If you want to invest in real estate property, for example, you’ll need substantially more capital than buying just a couple of stocks and bonds. So, before you commit, make sure that you have an investment budget that you are able to follow. Failing to do so could mean that you wind up incurring debt or become unable to meet basic needs.
Not understanding an investment vehicle
Investing can be pretty complex, especially for individuals who are new to the world of finances. Understanding your investment vehicle is essential to forecasting the future of your investment outcome and planning for your finances. Before you begin investing, you might consider taking a course in investment basics to learn best practices for choosing and managing assets.
Following emotions rather than data
Whether you’re a new or veteran investor, you likely understand that there is a certain level of risk associated with all investment types. And in order to succeed in the investment market, you have to A) accept the risk and B) know how to minimize risk for the best outcome possible. One of the most common mistakes inexperienced investors make is allowing emotions to control their decision making, rather than paying attention to market indicators and data. Of course, this is all easier said than done considering how stressful investment can be.
To avoid the pitfalls of emotional decisions, many talented investors turn to stress-reducing practices, including:
By approaching financial decisions with a level head and a clear plan in place, you’ll likely see a more positive outcome.
Not diversifying assets
As we briefly mentioned, risk assessment plays a major role in investing, and some investments are inherently riskier than others. In order to position themselves for security and ideally, profit, investors have to find the right balance between those “safe” and risky investments. Diversifying assets is a critical step in the process. Diversifying assets means that you choose a combination of investment types and/or verticals to minimize your risk — basically, the investment philosophy encourages investors not to put all their eggs in one basket. This way, if one investment plummets, you’re not necessarily out of luck completely, thanks to your diverse portfolio.
Jumping into the investment market can be a serious learning curve for newcomers and financially-savvy individuals alike. But with enough research and knowledge of common investing mistakes, you’ll certainly be in a more positive position as you start this new journey.
To review, investors should avoid these common mistakes:
- Not following a budget
- Failing to understand investment vehicle(s)
- Making emotional rather than data-driven decisions
- Not diversifying assets
Did we miss anything? Let us know what you’ve learned throughout your investing experience in the comment section below!