If you're a beginner investor, then you probably know how complicated the entire process can be. Not only are there many different types of investments, but without following the correct procedures, it's very easy to lose your money. This is why it's important to know what to stay away from when handling your finances. Otherwise, one wrong move can make a tremendous impact.
Below, we are going to look at ten different mistakes that you should avoid when investing your finances. Want to learn more? Then keep on reading.
Investing without a plan
It's easy to want to jump right into buying and trading, but investing still requires a plan like most things. You need to establish goals and set yourself a budget otherwise you're not going to get any returns. Remember, you should never invest money that you can't handle losing, especially if you're choosing something that is high risk. Think about starting small and building up your portfolio over time. This way, you get a feel for the industry and what investment types you prefer.
Not setting achievable goals
You might go into the investing process thinking you are going to become a millionaire. However, it's best to stay away from getting unrealistic expectations. While it can bring great returns and stabilize your finances, it takes time, and you need to be patient. Instead of thinking about the short-term results, look at what a market will do in several years. By setting yourself goals, you can invest responsibly and figure out how much risk is really worth it.
Not doing any research
As mentioned above, there are many different types of investments, and they all work in different ways with varying risks. You can't simply start investing in whatever you feel like without understanding how each and every one of them operates. Do your research, understand the pros and cons, and become 100% certain before putting any money on the line. Here are a few examples of low and high-risk types to get you started.
- Certificates of deposit
- Savings account
- Government bonds
- Real estate
- Hedge funds
- Private company investments
Paying too much in fees
As a beginner, you may be tempted to go with the first brokerage you see. However, it's important to keep in mind that they all charge different fees when you buy, sell and trade. Do your research into different options, and make sure you find somewhere that works for you so that there are almost no transaction fees. You should also remember while commission-based planners may be helpful, they will also take away a chunk of your potential earnings.
Having low liquidity
Liquid assets are those that you can sell quickly. It consists of things like cash and money market instruments. Having low liquidity can put you at serious risk, especially if something happens and you need money to keep you afloat. Most experts recommend keeping at least enough to keep you supported for one or two months. However, it does depend on each person's individual living situation. Just think about what you would need if the market were to close suddenly.
Not diversifying your portfolio
You've probably heard this many times, but we can't stress it enough. Don't put all of your eggs in one basket. You need to have a selection of investments in different areas so that your entire portfolio doesn't get impacted if one underperforms. For instance, you might have Canada index funds, as well as cash, cryptocurrency, and real estate. By diversifying, you lower risk, and the chances of losing everything are significantly reduced.
Over diversifying your portfolio
Another thing you need to think about is over diversifying. Yes, it is possible. Choosing too many assets can cause a higher risk as the benefits of some investments are canceled by others. Some signs you may have over-diversified your portfolio include:
- You have many mutual funds that fall under one investment style.
- You own many individual stocks.
- You're paying for a multimanager as you don't have time to handle everything yourself.
Trading too often
If you are going to be trading stocks one thing you must avoid is trading them too often. Moving things around back and forth will cause tax problems and may even build up some hefty transaction fees with your brokerage. Trading can be fun, but make sure you are doing it carefully and stick with your initial plan. Otherwise, the returns you are potentially making are going to be chewed up on other expenses.
Reacting to media
You may get into the habit of watching media for information regarding the investment industry, but relying on it too much can negatively affect you. The media likes to make things look worse than they actually are as a way to induce fear. This can then cause a panic in the market, which leads to irrational decisions. Still, make sure to keep yourself informed, but don't go being impulsive until you have fully assessed the entire situation.
Not seeking professional help
Investing is hard, and unless you are a professional yourself, you are going to need help. Don't try and tackle things on your own if you are a beginner, as you will only get yourself in debt. Find a trusted advisor and mentor so that you are still a part of the process without having to learn the ins and outs of the entire industry. Trust us when we say you'll get great rewards and won't be so physically stressed.
And that's it. These were ten mistakes that you need to avoid when investing your finances. While it might seem like a lot to remember, it's essential to know what to watch out for so that you can create a stable portfolio and generate the best returns possible. By growing your financial education, you can reap the rewards.