Making the decision to become an investor is a smart financial move because you money works for you and you get to increase the sources of your income. But the investing journey is filled with many pitfalls that could cause you to lose your capital – because mistakes are costly. Unfortunately, rookie investors often make some mistakes because they lack experience and proper investing education. This piece provides information on some rookie investment mistakes you need to avoid.
1Mistaking investing for gambling
Investing is not gambling and neither is investing in the same boat with speculation. You are simply gambling if you buy stocks, commodities, or real estate without technical/fundamental analysis.
Merely hoping that your wins will be more than your losses is gambling. If you buy stocks based on hot tips from ‘gurus’ you are speculating and you’ll end up with more losses than gain in the long term.
2Not doing enough research
It is very easy to assume that a stock will deliver impressive gains this year because it has delivered gains in the last three years. However, you cannot afford to ignore the importance of technical and fundamental analysis if you want to be a successful investor.
You need to know the risk-reward potential of any investment in order to ensure that you are making informed investment decisions.
3Investing without a time frame
Investing is a time-dependent activity because you need to know the opportunity cost of putting your money in one investment instead of another investment (or having it in the bank).
You need to know if you are investing for the short term (trading is more apt) or investing for the medium to long term. The timeframe of your investing plans can help you in choosing the right kinds of assets so that you are not forced to sell off your investments prematurely.
4Putting all your eggs in the same basket
Rookie investors tend to be susceptible to tunnel vision when making investment decisions. They could be fixated on Bitcoin and put all their money on Bitcoin because everybody is talking about cryptocurrency. However, it is important to diversify your investment portfolio in order to avoid overexposure.
5Mistaking low price for good price
Many inexperienced investors tend to focus too much on the cost price of an investment without paying much attention to the value they are getting in return.
Jeremy Meyer, an analyst at Lionexo submits that “that an asset has low prices doesn’t mean it is cheap and a cheap asset is not necessarily a good investment. You might buy a cheap stock today and it turns out to be a dud as the price falls even lower.” Conversely, a high-priced stock might be a great investment if it has upside potential and you earn income in the form of dividends.
6Not paying attention to the cost of investment
One of the commonest mistakes that rookie investors make is not paying attention to the costs associated with investment activities.
Depending on your preferred investments, you might need to pay trading and brokerage fee when you buy/sell your assets. Hence, it’s in your best interest to find a broker that offers excellent service without charging exorbitant fees.
You’ll also need to remember that tax consequences of your investment. Some investments such as municipal bonds might have tax waivers but you’ll pay taxes on almost all other types of investments. You need to be sure that your ROI will still make financial sense when you are done adjusting for taxes.