Top 5 Investing Mistakes Young Investors Make
So you’ve entered the workforce and you’re looking to start investing. Here are a few common mistakes that people in your shoes make. Learn from them, and you’ll be a better investor.
1. “Playing it safe”
If you’re young, almost all of your investing dollars should be in the stock market. You have plenty of time to weather any volitility the market can throw at you. I know far too many people in their 20s who are fiddling with bonds and thinking they’re financially savvy. It’s so sad to see that. “Play it safe” is in quotes because the market isn’t dangerous, and avoiding the market isn’t necessarily “safe”. Throughout history, over every 10 year period, the market has always gone up. The average long term rate of return on the stock market is 11%, and that’s the whole market, ie index funds. If you’re picking well managed, solid companies and doing your research, you’ll see returns much higher than that. The key word in all that is long-term, you have to be in it for many years, you have to have patience.
2. Not playing it safe enough
On the other side of the coin, there are young investors who don’t research their investments beforehand, who buy into stock hype, who put all their money into one stock, or who play the stock market like it’s a casino. If you invest haphazardly, just following the hype of the herd and not doing your own research, the market can burn you. You have to realize that when you invest, you’re buying part of an actual company, you’re becoming partial owner. So always do your due diligence; research, research, research.
3. Jumping in and out of the market
A lot of young investors who finally get convinced to cash in their bonds and invest in the market still have worry on their mind. That worry will make them cash out at the first sign of trouble, which is the worst possible thing they could do. The best approach to investing is the long-term one. Spend the time before you invest to pick your investments well, and you’ll reap greater rewards over the long term than you ever imagined possible. If you pop in and out of the market, you’ll be weighed down with fees that destroy your returns and ruin the gains that long-term investors enjoy.
Another reason young investors leave the market early is because they hadn’t planned properly and think they can invest for the short term. Only invest money for the short term that you’re actually going to need in the short term. Invest money in the stock market that you won’t need for at least five years or longer. If you’ll need your cash next year a house or a car, maybe the stock market isn’t the best place for that money.
4. Trying to time the market
Every day, hundreds of stocks move up and down by substantial percentage points. Many young investors think, if they could just figure out which stocks will move which way, they’d be rich overnight. Buy low and sell high, right? Profits!
The thing is, that doesn’t work. Researchers around the world have tried to pin down the exact fluctuations of the market and tried to work out a daily system of buying and selling. They’ve all come up with the same answer: Over the short term, price changes are essentially random. The only thing that isn’t random is quality. If you invest in well-run, quality companies, their stock will go up over time. It won’t happen overnight, but it will happen.
5. Doing nothing
The worst of all the errors is doing nothing. Time is the most powerful tool for the investor, time allows your investment to compound and grow exponentially. Don’t try to time the market of wait for a good entry point. Don’t out off until tomorrow that which you could do today.
