- There are some common mistakes that investors tend to make that can hurt their overall portfolio and their performance over time
- Learning about some of those mistakes can help give you the information to avoid making them yourself
Before you start investing, it’s easy to worry that you’ll make the wrong move and mess up your entire portfolio.
Luckily, that’s much harder to do if you’re following some of the steps you’ve already learned about in this course, or using an automated investing service like Twine, which is why you should never let the fear of making mistakes stop you from starting to invest.
But on top of those steps, learning about common investing mistakes can help you side-step them if they do come up.
These five things can hurt your overall performance, whether it’s by impacting your portfolio or keeping you out of the market entirely—so we’ve also included some steps to make sure they don’t trip you up.
Mistake #1: Basing Investment Decisions Only on Past Performance
There’s no way to predict the future when it comes to investing, but that doesn’t stop us from trying.
However, it’s a mistake to assume that an investment that has done well recently will keep doing well.
The same goes for investments that have done poorly recently—that’s not a reason to avoid the investment because it still might enhance or diversify your portfolio.
If you’re using a service like Twine, this is one mistake you’ll be able to easily avoid, since your focus will be on choosing a portfolio that fits your goals and your timeline—not picking individual investments.
Mistake #2: Avoiding International Investments
It’s natural to feel more comfortable when you understand something, and for most of us, we feel like we understand our local economy pretty well.
But that leads a lot of investors to invest heavily in their home country when a more diversified portfolio with exposure to international markets might be a better fit for their goals.
There’s a place for domestic investments in your portfolio, but it’s all too common to put too much of your portfolio where you live.
To avoid this mistake, make sure that you’re investing in a diversified portfolio in both asset type and location.
Mistake #3: Thinking Bonds Can’t Lose Money
Bonds are an important part of your asset allocation, but many people believe that since bonds are less risky than equity investments, their investment in bonds won’t lose money.
That’s not the case, and even though bonds tend to be less risky, they aren’t without risk. It’s possible for your portfolio to go down even if you’re 100% invested in bonds.
That’s why it’s most important to focus on understanding your asset allocation, and how different asset types can work together to build a portfolio that suits your goals.
From there, you can make a decision about what percentage of your portfolio should be in bonds, and stick to it (even if bonds do go down).
Mistake #4: Trying to Time the Stock Market
It’s hard to forget the catchy and all-too-common investing cliche, “Buy low and sell high.” That’s why people still attempt it, but trying to implement this advice is a mistake.
Buying low and selling high is nothing more than trying to time the market, and as we’ve discussed, timing the market isn’t a good investment plan.
Instead, focus on time in the market.
As you know, the longer you invest, the more time your portfolio has to grow. Once you’ve got a portfolio that works for you, set up automatic deposits on a regular schedule and let the investments do their thing over the long term.
Mistake #5: Ignoring Inflation
It’s easy to feel like your money is safe and sound in a savings account, but the one risk people often forget is inflation.
If you’re earning 1% in interest in a savings account, but inflation is rising at 2% per year, you’re effectively losing 1% in purchasing power.
There’s always a case to be made for keeping some of your money in a savings account to access it quickly, but investing can help your savings grow in order to outpace inflation.
Both are key pieces in an overall financial plan.
How Can You Avoid These Investing Mistakes?
You might have noticed that many of the strategies to avoid each mistake boil down to a few key, repeatable strategies, that you’re likely familiar with now that you’re almost done the course.
Build a diversified portfolio. Before you start investing, take time to understand asset allocation and diversification, and invest in a portfolio that makes sense for you.
Sticking to that plan is one way to avoid buying high and selling low, or falling into the common mistake of preferring certain investments over others for reasons that don’t actually improve your performance.
Focus on time in the market, not timing the market. Start investing as early as you can, and contribute on a regular basis, no matter what the market is doing.
The longer you invest in a diversified portfolio, the more likely you are to see returns, even if you can only invest a small amount every month. Plus, the longer you’re invested, the more time you have to grow your portfolio.
Once you’ve done those two things, which is easy to put into action using a service like Twine, you’re well on your way to avoiding some of the most common mistakes investors make at all levels of experience.
Investing 101: Let’s do this
Investing doesn’t have to be something scary and intimidating, and it’s one of the most powerful ways you can hit your goals and build wealth over the long term.
Make a Plan:
- Should I Save or Invest?
- Understanding the Stock Market
- Long-Term Investing
- The Relationship Between Risk and Return
- Investing for Beginners
- The Benefits of Diversifying Your Investments
- Types of Asset Classes
- 5 Common Investing Mistakes