Investing for Beginners: 8 Common Investing Mistakes You Must Avoid
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The fact you are reading this blog post on InvestingHero means you have some curiosity into investing, and already some awareness of the value it can bring.
Reaching this awareness stage shouldn’t be underestimated – a staggering 61% of Swiss residents don’t own any shares… so you are in the minority, well done!
Despite not being the normal status quo in Switzerland, investing in the stock market is often considered one of the best ways to grow your nest egg over the long term.
But make no mistake, investing can be confusing for beginners. From the adrenaline fuelled Hollywood perception (maybe you’ve seen Wolf of Wallstreet) to the realities of handling a market crash – as a newcomer you’ll have lots of questions and concerns about taking that first step.
Rest assured the reality is you don’t need to be a financial professional, ‘high net worth individual’ or read the finance section of the newspapers to make a start. But there are a few important things to look out for.
This article will help you avoid 8 common investing pitfalls to get you started.
1. You don’t define a plan and goal.
Planning and setting goals
are number 1 on this list for a reason, and the first step in the financial
planning process for investing.
Understanding the motivation behind your decision to invest that spare cash in your bank account is critical to stay ‘committed to the cause’ and to avoid straying off course in times of uncertainty.
Regardless of how consistent and disciplined you are, there will be some scary uncertainty, that’s guaranteed.
But like a rollercoaster, scary is ok now and then. It’s only a problem if you try to jump off at 70km/h.
Maybe your investing goals are for the freedom to travel more or pay off the mortgage. Maybe it’s having the option to see your kids more often, or to care for your aging parents without being chained to a full-time job. Shaving off a few years of the state retirement age to sit by a pool?
That’s fine too.
Maybe it’s a combination of many things.
While the above are nice examples many of us will share – I challenge you to go deeper to understand your own meaning. Try going 7 levels deep to get beyond the knee jerk ‘to make money, duh’ reaction to get to the core of why it’s important to you.
It’s not easy. But keep drilling to evaluate the core meanings behind your goals.
Once you have some high-level goals with meaning and purpose, your next financial planning steps should help you to answer the following:
- How much can you afford to invest each month?
- How long will it take to reach your goal?
- How much risk can you stomach investing in stocks?
- What types of investments should you be considering?
Answering these questions can take some time, but the answers are invaluable for your planning.
2. You don’t consider your current spending habits.
By evaluating your expenses now through a simple budget plan, you will recognise where you can reduce and reallocate more of your net income toward your investment efforts. Increasing your savings rate in the early days of your investing journey is by far one of the most powerful things you can do.
In the ‘Millionaire Next Door’ by Thomas J. Stanley, he says:
This quote rings true for more than just successful investing.
That doesn’t mean you need to live on 2minute noodles and start ducking into the toilet when it’s your round to buy drinks at the bar. And I’m not talking about cutting your Starbucks (although those prices are obscene) or avocado toast at your favourite café in Zurich at the weekends.
But when you are starting out, the fastest way to make progress financially is through making the right lifestyle choices.
Forget market returns, asset allocation and compound interest – for the first few years the best thing you can do is to live well below your means and increase your savings rate.
Simply start to be mindful of what you are buying online. Be mindful of those impulsive wants and urges in the supermarket. Be mindful of the urge to upgrade your latest tech gadgets. Your TV subscription or next streaming service.
Be mindful of the cost of throwing out that coffee machine for a new one, instead of trying to repair it.
Once you start plotting these costs onto a more detailed budget, you’ll be surprised at how much these little things can make an impact over the long term.
Be mindful of the impact of these choices with your investment plan.
3. You haven’t paid off bad debt.
Just because you have bad debt doesn’t mean you should stop reading this article. Your priorities just need to focus ruthlessly on reducing that toxicity as fast as possible.
Bad debt can be crippling to building your personal wealth. From overdraft fees to high interest rate repayments, they’ll eat away at your goals. It’s therefore important you work through a financial plan (see step 1 above) to get your house in order and understand the debt you have before you consider investing.
There are many types of debt, and not all of it is necessarily ‘bad’. Typical examples of bad debt include credit cards and loans, which left unmanaged, (e.g. missing the repayment date) can trigger high interest rates on the money owed.
‘Better’ or ‘good debt’ are things such as student loans and mortgages – which hopefully have more of a reasonable fixed and predictable interest rate you can factor into your monthly expenses.
In the words of Charlie Munger, VC of Berkshire Hathaway:
But be very wary of taking on extra any debt in the first place. If you can, avoid it all together.
4. You can’t sleep comfortably at night.
You need to feel comfortable with your investing approach. Risk tolerance is a very individual thing, and everyone has a limit to the amount of money they can afford to loose.
And the biggest risk to your investment?
Pausing, hesitating or playing around with your investment strategy in a downturn will impact the performance. No amount of blog posts or books will prepare you for the feeling when you see your account drop 10%. And then continue dropping another 30% as the market tanks.
You can’t teach those gut wrenching feelings in a blog post.
But with a long-term investing timeframe, the chances are not ‘if’ such a drop will happen, but ‘when’.
It’s challenging to stay the course with your investment plan when these things happen, but as we’ve said – jumping off the rollercoaster in these times is the worst thing you can do.
Get comfortable being uncomfortable and stay the course.
The market owes you nothing, and there is no gain without a little pain from time to time. If you don’t like the idea of going through some pain, that’s fine – but your investing portfolio needs to reflect that.
Determining how much you are willing to loose, and how much you can financially afford, are key questions to answer to not only ensure you sleep well, but reduce panic decisions and support the long-term sustainability of your investment portfolio.
5. You buy individual stocks.
Be it Tesla or Google, Facebook or Amazon – randomly buying individual stocks, penny stocks or companies making the news through a recent high-profile IPO (e.g. think Uber, Snap and Beyond Meat) debut on the stock market is rarely a good idea.
You won’t learn how to pick stocks or find any stock market predictors in this article. Sorry about that.
By all means, allocate a small percentage of your budget to ‘gamble’ with stock picking ideas in order to keep yourself honest and have some fun, but stock picking should not form the foundation of your long term investment strategy.
You are far better off looking at index stocks, which comprise of many hundreds (even thousands) of different companies from all over the world within a single fund. Some companies in the index fund will outperform others, and that’s the beauty of it – you don’t have to worry about learning to buy stocks or finding the ‘right’ companies, because you own them all to begin with – insert evil laugh here.
In the words of John Bogle, founder of the Vanguard index funds, which are often regarded as some of the best index funds available, once said:
Although he was biased, the data backs up this statement.
In the book “A Random Walk Down Wall Street” Burton Malkiel wrote:
“A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the experts.”
A fun test and jab against professional hedge funds, but one which has been repeated many times over (not always with monkeys, but random computer simulations) in proving the odds of individual stock picking being stacked against you.
So maybe you should take a trip to the zoo. Or just avoid stock picking all together.
6. You withdraw from your investment portfolio.
Unless something unexpected happens, such has the roof caving in and realising you didn’t extend the house insurance to cover the repairs, there should be no time, apart from when you reach your goal, when you withdraw from your investment portfolio.
For such emergencies, beginners should work towards having an emergency fund. The amount of which will depend on the individual, but typically ranges from 2-6months salary to cover unforeseen events which haven’t been budgeted for.
In Dave Ramsey’s “The Total Money Makeover” he advises to reach a small “baby emergency fund” of $1000 as your first step.
In Switzerland, that might need to be tweaked to around 5K CHF, but the idea is to achieve a short term goal and establish a buffer to cover those unexpected life events which fall outside of your regular budget.
7. You try ‘to time the market’.
“I’ll just wait a few weeks until the price drops a little, it seems a bit expensive right now according to these stock charts.”
What are you, Rain Man?
No one knows exactly when to buy and when to sell. Despite what you read about market trend signals, predicting when a market has reached the peak of a bubble, or hit rock bottom following a crash consistently – is next to impossible. So don’t waste time trying.
You just don’t know where the price will be tomorrow. One thing is for sure though, it’ll either be up, or down. And you should buy.
There will be many highs and many lows along the way with a buy and hold investing journey, so don’t sweat the current valuations or ‘record highs’ headlines you read. Even when you buy shares at ‘all time highs’, over the long term you’ll still win if you stick with the plan.
Albert Bridge Capital talks about the astronomically bad odds against you for successfully picking the right ‘cheapest day’ to invest over a 30year timeframe – it’s ‘one-in-1240’ followed by another 69 zeros if you wanted to know.
But lets say had you done so successfully, with 1K USD invested in the S&P500 every year. You’d have earned a total of 155K USD. Not bad at all.
But now imagine at the opposite end of the spectrum and you became the world’s most unluckiest investor.
You somehow managed to pick every ‘all time high’ day with your 1K USD investment over 30years in the S&P500, the exact opposite of our lucky friend above who returned 155K USD.
How much do you think your nest egg would be worth with such terrible luck?
122K USD. Yup. You’d still have returned 80% of the nest egg from the mathematically impossible market timing example.
So don’t wait around for the ‘right moment’ to get cheaper stocks, just buy them consistently and forget about it. Time spent in the market is far more beneficial than trying to time the market.
8. You pay too much.
You owe yourself a huge pat on the back to making it this far in your investing journey, and even more so for reading this long blog post. To have ‘fees’ and ‘paying too much’ a problem, you are already well on the way and ahead of the crowd. Well done.
For the first few years, paying too much isn’t really a problem (within reason) as you adjust and learn to this new environment.
There are far more important things, as we’ve covered in steps 1-3, which should be your priority when you are starting out.
If you go to your local bank and deposit 10K into shares with an expense ratio of 2% just to get started with something, I think that’s ok. It’s like having a dash of salad dressing to eat that healthy salad.
If the convenience of your bank means you start investing (eating that salad) vs. doing nothing at all (not eating a salad) and holding cash for 30years – then credit to you for making a start with at least something.
That said, while that might be ok for a year or two, it’s important not to be complacent when it comes to fees over the long term.
Today, you can easily invest in the stock market using ETF (exchange traded funds) index funds, as we discussed in step 5, where you’ll be paying considerably lower fees for your investment. When you are starting out, there is simply no reason to be paying more than a few basis points to hold your nest egg.
Be sure to look for the ‘TCI’ (total cost of investment) on any investment you are considering. Don’t focus on the rather misleading ‘TER’ (total expense ratio) ‘AMC’ (annual management charge) or the ‘OCF’ (ongoing charges figure) which won’t give you the full picture. TCI – Total cost of investment is the eye opener.
When you are ready to start, print out the forms, make a copy of your utility bill and return the paperwork to open an investment account. No amount of research and reading will take that action for you.
And remember, you don’t need to know everything from day 1 to get started.
But above all else, stop procrastinating and just get started.
What did you think of the 8 points above? What would you add or remove to the list, and why?
Let us know in the comments below.