6 Common Investing Mistakes Beginners Make and How to Avoid Them

When it comes to investing, there are a lot of things that can go wrong. And unfortunately, many beginners make investing mistakes that cost them a lot of money.

If you're just getting started in the world of investing, it's essential to be aware of these potential pitfalls to avoid. Here are some of the most common mistakes beginners make when investing:

#1 Not Having a Game Plan

Warren Buffett once said, "An idiot with a plan can beat a genius without a plan,” and this is especially true in investing. Before you start investing, you need to know what your goals are. Are you looking to retire early? Or are you trying to save for a specific purchase? 

Once you know your goals, you can develop an investment plan to help you stay on track. Without a plan, it's easy to get off track and end up losing money.

Here’s how you can create an investment plan:

Step 1: Assess your current financial standing. 

Your financial standing is how strong your financial situation is. Before anything else, you need to know your income, expenses, debts, emergency funds, etc. This way, you’ll know how much to invest.

Step 2: Define your short-term and long-term goals. 

The plan that you come up with will depend on your goals. For instance, when do you want to retire? Do you need to buy a house? How much money do you need to achieve this?

Step 3: Determine how much risk you can take

All investments involve some degree of risk. How much risk can you take based on your goals? For instance, if you're investing in retirement, retirement is 30 years away. You can thus invest in riskier ventures because you have time to recover in case of any economic downturns.

Step 4: Decide What type of investment to make

Next, pick the type of investment that matches your risk tolerance. There are several types of investments that you need to be aware of. These include:

• Stocks: Investing in stocks means buying shares of ownership in a public company. You can earn returns by selling the stocks at a profit or through dividends. 
• Unit Trusts: When you invest in unit trusts, your money is pooled together with money from other investors and invested in assets such as treasury bills and government bonds.
• Bonds: A bond is a loan from an investor to a company or the government in exchange for regular interest payments.
• REITs: Real Estate Investment Trusts (REITs) are regulated investment vehicles where investors pool money and invest in large-scale income-producing real estate.

#2 Not Starting Soon Enough

“The early bird catches the worm” This adage applies to all aspects of life, including investing. The earlier you start, the higher your chances of success. 

When young, you can invest in riskier or volatile investments and have the chance to earn better returns since you can recover from wrong decisions without hurting your long-term financial goals.  

Besides, if you start early, you can earn from the magic of compounding. So, start investing today since you have enough time to generate wealth.

Read Also: 5 Reasons Why You Should Start Investing Early

#3. Investing All of Your Money

When you're a beginner investor, it's tempting to want to invest all of your money right away. That's a mistake. You should always keep some cash on hand in case of emergencies. So ensure you set up a rainy day fund before you start investing.

Here’s how you can set up an emergency fund.

1. Know the amount you need for an emergency fund. A general rule of thumb is to keep three to six months' worth of expenses in an emergency fund. 
2. Open an account to keep your emergency fund. You can set up a high-interest savings account or a money market account. These will allow you immediate access to your funds in case of an emergency.
3. Automate your contributions. To instill financial discipline, set up a standing order with your bank on the money you want to be transferred to your emergency fund.
4. Save consistently. This is the only way you'll expand your emergency kitty.

Read Also: Easy Steps to Create an Emergency Fund In 100 Days

#4 Not Diversifying Your Portfolio

Diversification is key to any sound investment strategy. By spreading your money across different asset classes, you minimize your risk and increase your chances of success.

And more importantly, you need to diversify your investments so that you're not putting all of your eggs in one basket. If one investment goes sour, you won't lose everything.

Read Also: Why You Should Diversify Your Income

#5 Not Doing Enough Research

Investing without doing your homework is a recipe for disaster. You need to know what you're buying and why you're buying it. Otherwise, you could end up losing a lot of money.

You should understand the risks and rewards of each investment. Don't just blindly follow someone else's investment strategy.  You could end up following bad advice that leads you astray. Stick to reputable sources, such as financial publications and websites like Money254.

#6. Not Automating Your Investment Contribution

When starting, it's easy to forget to make your investment contribution. However, you're sure to continuously invest a set amount of money by automating your investment contribution. You won’t be tempted to skip a month or spend the payment on something else.

Also read: How to Automate Your Finances Save Time, Money, and Stress 

WRAPPING UP

By avoiding these common beginner investment mistakes, you'll be well on your way to success as an investor. Just remember always to have a plan, diversify your investments, and do your research. If you can do that, you'll have a good headstart.