Whether you’re saving for retirement or looking for the best places to buy commercial real estate, prudent investment advice can help. Although all types of investors make mistakes, newbies are more prone to common ones such as trading too often or trying to become rich overnight. If you’re just starting out, falling for these can eat away at your potential returns in an instant.
Luckily, these rookie mistakes are fairly easy to spot. Below are five to watch out for:
1. Not Understanding a Business
The 93-year-old Warren Buffett knows a thing or two about investing. One thing he has cautioned against for decades is investing in companies you don’t understand. If a newfangled company comes out promising the moon, stay down to earth.
Unless you thoroughly understand how a business makes money, avoid investing in individual businesses. For rookies, this is particularly important. Instead of trying to pick the right business to invest in, consider buying mutual index funds. This strategy immediately diversifies your portfolio, earning you a healthy return while mitigating risks.
2. Trying to Get Rich Quick
Rookie investors—and most investors to be honest—don’t get rich fast. If that were the case, anyone with an extra buck would throw it in the stock market, wait a week, and retire. Rather than getting rich, assuming you can make a lot of money in the short term is a surefire way to fall for get-rich-quick schemes. Those schemes certainly do make someone rich, but it’s never the rookie investor.
Instead, adopt a long-term approach. Although less exciting, consistently growing your portfolio over decades will lead to big returns. Plus, you’ll avoid debilitating crashes along the way.
3. Getting Attached to a Company
Successful investing requires a certain amount of objectivity. Legendary investors like Charlie Munger are known and admired for their clear thinking. Getting too emotionally invested in a company distorts that. All too often, it leads investors to ignore red flags.
Common red flags include senior leadership abruptly leaving, or assets continuing to underperform. If you see signs like these, it might be time to leave—strong returns in the past are no guarantee of what will come in the future.
4. Investing Money You Don’t Have
Before you start investing, make sure your finances are in order. If you’re saddled with debt and barely covering rent, it’s not the best time to play around with investing. If you do, you might be tempted to put all your money in short-term investments that rarely, if ever, work out as anticipated.
Instead of falling into that trap, improve your financial future by focusing on fundamentals. Create a budget to reign in excess spending, pay off debts to free up cash, and build up an emergency fund to pay for unexpected bills—car repairs, medical expenses, and the like.
5. Trading Too Often
Some newbie investors enjoy the process of learning about companies, spotting new opportunities, and playing around with the money they have. Buying and selling shares is a game they hope will lead to huge rewards.
Unfortunately, frequent trading eats away at the potential rewards very quickly. Every time you make a trade, a transaction cost is incurred. In addition to transaction fees, there’s short-term capital gains tax plus the opportunity cost of forgoing long-term gains.
Investing is just like any other skill or vocation—mistakes will be made. However, that doesn’t mean you have to fall for the most common ones outlined above. Instead, know what they are and develop strategies to avoid them. Keep your calm, understand how businesses work, and invest in the long term. Healthy returns await!