The idea of making your money work for you through investments is appealing. It is also one of the ways to accumulate wealth. However, if you are a beginner investor, be warned that investments are not a free lunch. You could lose all the money you have invested, making you worse off than you were before you started. To prevent this, here are ten mistakes to avoid:
Investing does not equal gambling
Don’t confuse gambling or speculation with making an investment. If you are acting on a hot tip or blindly picking a stock, you are not investing. Investing means making a decision that you are comfortable with and prepared to stick with for a while.
Research is key
Not researching the investment you are interested in. Research helps you understand an instrument or product and know what you are getting into. If you are investing in a stock, for instance, research the company and its business plans.
Not have a time horizon
Also, don’t invest without a time horizon in mind. If you are planning to accumulate money to buy a house, that could be more of a medium-term time frame. However, if you are investing to finance a young child’s college education, that is more of a long-term investment. You will have to find investments suitable to your time horizon.
Not balancing risk and return
Remember that the return you expect comes with a risk. If an investment offers very attractive returns, also look at its risk profile and see how much money you could lose if things go wrong. And do not invest more than you can afford to lose.
Not consider your own risk aversion
Do not lose sight of your risk tolerance, or your capacity to take on risk. If you are the sort of investor who can’t stomach volatility and the multiple ups and downs associated with the stock market, maybe you would be better off investing in the blue-chip stock of an established firm rather than in the volatile stock of a startup firm.
Do not put all your eggs in one basket. Diversification is a way to avoid overexposure to any one investment. Having a portfolio made up of multiple investments protects you if one of them loses money. It also helps protect against volatility and extreme price movements in any one investment.
Don't be fooled by low prices
Just because you are able to buy something at a low cost, doesn’t make it a good investment. Investment is about finding value. A high-priced stock could still offer value in terms of the prospects for return. A low-priced penny stock could look alluring based on price but may be a terrible investment.
Remember the tax
Keep in mind the tax consequences before you invest. You will get a tax break on some investments such as municipal bonds. Before you invest, look at what your return will be after adjusting for tax, taking into account the investment, your tax bracket, and your investment time horizon.
Don't ignore the fees
Do not pay more than you need to on trading and brokerage fees. By holding on to your investment and not trading frequently you will save money on broker fees. Also shop around and find a broker that doesn’t charge excessive fees so you can keep more of the return you generate from your investment.
Not everyone does thorough research
Do not act on the premise that markets are efficient and you can’t make money by identifying good investments. While this is not an easy task, and every other investor has access to the same information as you do, it is possible to identify good investments by doing the research.
The Bottom Line
If you have the money to invest and are able to watch out for these beginner mistakes, you could actually make your investments pay off. And getting a good return on your investments could take you closer to your financial goals.