6 common investing mistakes to avoid
Many experts contend that investing is key to building wealth. But there are right and wrong ways to go about it. Of course, that doesn't mean you need to become a stock market guru to try your hand at it. Rather, it can help to familiarize yourself with common mistakes investors tend to make, so you won't end up repeating them. If you can do that, "can be enough to give you the edge you're looking for" in your investing journey, said Kiplinger. Here are six investing mistakes, and how to avoid them.
1. Failing to diversify
For the average investor, diversification is key to managing portfolio risk. In other words, rather than taking a few concentrated positions, you'll want your portfolio to contain exposure to "a range of different assets, sectors and geographic regions," said Kiplinger. If any one area of the market tanks, you'll have other areas of investment to help moderate the impact on your portfolio.
Just how much should you aim to diversify? "As a general rule of thumb, do not allocate more than 5% to 10% to any one investment," said Investopedia.
2. Letting your emotions guide you
Another common mistake among investors is making decisions based on emotions rather than allowing market data — and, more importantly, their own long-term goals — guide them. While it's understandable to feel a bit unsettled when the market falls and you lose money, it's important to remember that "historical returns tend to favor patient investors," according to Investopedia.
Being patient is often easier said than done. One trick is to unplug. "Turn off the TV and check your accounts on a less frequent cycle, like once per month," Dani Pascarella, CFP, founder and CEO of financial planning company OneEleven, said in an interview with Bankrate. "Educating yourself on investing and economic cycles will also help you to feel confident about your investments and ignore all of the noise."
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3. Falling for the hype
Following the crowd — or a popular investing guru — is another way investors are frequently led astray. The "overall guidance from experts is simple" on this one, said CNBC Select: "Don't take investment advice from those who don't know your personal financial situation."
Just because something works for someone else doesn't mean it will be right for your financial situation. (There's also a chance their information isn't accurate.) Rather, do your research and consider your own financial reality to determine what's appropriate for your portfolio.
4. Attempting to time the market
Many investors try to score big returns by buying high and then selling low — a practice known as "timing the market." But getting the timing of your buying and selling exactly right isn't an easy thing to do. "Attempting to time the market to avoid a loss and jump back in at the perfect time is nearly impossible to do consistently," Kevin Matthews II, author and founder of investing company BuildingBread, told Bankrate. "This is because like a slot machine you have to get three things right to win: When to get out, what to buy, and when to get back in. Missing out on just one of those can have a drastic impact on your portfolio."
Instead, investors might be better served by working to build a diversified portfolio with an asset allocation that aligns with their own unique investment goals and tolerance for risk. And then, let your money grow. Another common mistake among investors is a "lack of patience" when a "slow and steady approach to portfolio growth will yield greater returns in the long run," per Investopedia.
5. Neglecting to do the research
Before you invest, it's critical to conduct research and do your due diligence. Even Warren Buffett "cautions against investing in companies whose business models you don't understand," Investopedia reported.
Further, you'll want to base your investing decisions in the numbers, rather than on your assumptions about a company or its reputation. You should "look at historical returns and think critically about the nature of the investment itself," Kiplinger said. And even if a company looked good when you initially bought it, if that changes, don't hesitate to change course yourself, Investopedia said.
6. Investing too much, or not enough
It's both possible to invest too little — and too much.
When you invest too little, and end up holding most of your money in cash, that effectively "means missing out on potentially better returns," Experian said. While you might not run the risk of losing money, you also don't have much of a chance to reap rewards.
On the flipside, when you overinvest, you might put money into the market that you're actually going to need pretty soon, or push other financial obligations to the wayside. "Without a dedicated emergency fund, you might be forced to sell investments at a loss when something unexpected happens to try and cover the expense," Pascarella told Bankrate. "If you have high-interest credit card debt, it's likely the interest you are paying is double what an investment portfolio would generate for you in a given year."
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week's sister site, Kiplinger.com.
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