Do you invest your money? Are you thinking of investing but worried about making a mistake?
Jon Dulin, a Financial Expert who writes for Money Smart Guides broke down the 5 most common investing mistakes he sees people make and what you can do to make sure you don’t make the same ones.
Thinking Investing a Small Amount of Money Is a Waste of Time
A common misconception about investing is that you need thousands of dollars. The reality is that you can invest even if you have a small amount of money. So, if you have $100 and want to invest, you should. Over time, even small amounts grow into larger sums.
For example, investing $100 a month for ten years grows to over $18,000. It isn’t enough to retire early, but it’s more than if you didn’t invest. The benefit of investing when you have a small amount to invest is that you are building a habit. When you have more money to invest, investing won’t be new. You will have experience and can invest more, which will grow into larger amounts.
If you don’t have a lot to invest but want to do it, plenty of brokers out there allow you to invest as little as $100. Some even let you invest $5 or $10. While you won’t become rich, you will have more money than if you didn’t invest.
Not Controlling Your Emotions
Most of the time, our emotions help us in life. When it comes to money, however, our emotions tend to be our downfall. Fear of missing out causes us to buy when stocks are overvalued, and fear of loss causes us to sell when our investment is worth the least. If you cannot control your emotions when investing, you are bound never to build wealth.
So, how do you control your emotions? There are three things you can do. The first is to create an investment plan. This lays out why you are investing (what your goals are), what you are investing in, how long you plan to invest, etc. Having this document is something you can review when the market goes wild, as it can help you look at things rationally.
The next thing to understand is you have to stick with the same investment. You can’t buy and sell every week or when you feel like it. If you are investing in mutual funds or ETFs, pick ones that cover the entire market, like the S&P 500 Index, or a large segment, like a large-cap value fund, and hold it for decades. Doing this allows you to earn the gains the market realizes.
The final thing you should do is understand the basics of the stock market. Know that it can swing wildly up and down over a short period. However, in the long term, the trend is up. If it weren’t, no one would be building wealth. Since 1928, the stock market has gained, on an annual basis, over 77% of the time. In other words, you have close to an 80% chance of making money in any given year as long as you stay invested.
Chasing Hot Stocks
Many people chase the idea of getting rich quickly. Some play the lottery in hopes of winning big. Others turn to the stock market and put all their money in the hot stocks of the moment or into what they think will be the next big thing.
Sadly, too often, this plan fails spectacularly. We end up losing most, if not all, of our money. I’m guilty of this, too. Back in the late 1990s, I put all my money into a tech mutual fund because it was returning 75% annually. However, the year I invested, the tech bubble burst, and I lost 90% of it.
As tempting as it is to hit the jackpot by picking the next hot stock or investing in the popular one at the moment, you are better off investing in the overall market. While this won’t make you rich tomorrow, it will achieve two things. First, you will build wealth over the long term, and second, you will invest in the next winner, just not with all your money.
Lack of Patience
Related to the point above, many of us want to be millionaires tomorrow. Unfortunately, social media has ruined our patience even more as we see the success of others without the context of all the hard work they put in to get to where they are. In some cases, we see the image of success.
So we invest in a stock, and when our investment doesn’t double in value, we sell. Rinse and repeat a few more times. Eventually, most people will either give up, thinking the market is rigged or decide to chase the next get-rich-quick scheme.
The truth is, if you can be patient, you can build wealth in the stock market. Investing $250 monthly for 30 years at 8% gets you over $375,000. Increase the investment to $700, and in 30 years, you will be a millionaire. It’s not sexy or exciting, but it works as long as you are patient.
Ignoring Fees and Expenses
Investing in mutual funds and exchange-traded funds costs money in the form of management fees. In most cases, this fee is less than 1% annually, so most investors don’t think much of it. What makes this fee even more tricky is that it comes out of the overall return of the investment, so there is no separate charge. For example, if you pay 1% and the fund earns 9%, you earn 8%, and the fund’s management team gets the other 1%.
Here is why this fee is a big deal. Let’s say you invest $500 a month into an ETF that charges 1%. The investment earns 8% annually for 30 years. Over this time, your investment is now worth $588,000. Not bad, right? During this time, you also paid over $120,000 in fees. This is what 1% comes to over 30 years. If you invest in a fund that only charges 0.50%, you end up with over $645,000. The bottom line is that fees matter.
Trying to Pick the Best Time to Invest
One last mistake many investors make is trying to time the market or pick the perfect time to invest. If the market is going up, they might hold off, waiting for a decline so they can buy at a lower price. Or if the market is declining, they might wait, hoping to invest at the absolute bottom.
The problem with trying to time the market is that no one knows when the market will drop or where the bottom will be. If we did, we would all be billionaires. The reality is that now is the best time to invest, regardless of what the market is doing. The sooner you get your money into the market, the sooner it can start compounding and taking advantage of time.
The longer you have to let your money grow, the more it will grow into. This is why investing $10,000 for 30 years, earning 8% annually, grows to over $100,000, and investing that same amount, earning the same return, but for 15 years only earns you $31,000. If you have the money to invest, invest it now. Don’t wait.
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