New to investing and want to avoid common investment mistakes? Trying to design the best path forward for your portfolio? While there are many myths out there about investing and what the best investments are, there are also some facts that can help you.
Don’t be fooled into making any of these mistakes. Here are some common pitfalls or misconceptions that can keep you from starting or building wealth.
Notice: I am not a financial advisor. This is meant for instructional purposes only. Consult a financial advisor for information regarding your specific situation. None of the links in this post are affiliate links.
- Using your home as an investment
- Not investing in the stock market early enough
- Not investing extra cash
- Not doing enough research on a stock or investment
- Trying to make investment decisions off the market predictions
Using your home as an investment
One of the most common investment mistakes that your average person makes is thinking of their home as an investment. There are multiple problems with this statement.
- Your home can not be turned into cash easily.
- It takes multiple years to build equity.
- Most houses do not generate returns over one percent and home values rise equivalent to inflation.
- Your property can be easily damaged and lose value.
- Your market value can go down due to low-income housing.
- Costs associated with maintaining, improving, and repairing can vastly outweigh the initial investment or provide substandard returns.
This is not to say that you should not buy a home. Rather, if you are buying a home, don’t think of it as an investment if you plan to occupy the home. Instead, buying a home should be seen as a permanent way to free up cash to then invest in the stock market. Buy a home if you plan on:
- Living in the same place for at least 5 years, preferably more.
- Want to free up cash and future earnings to invest in other items.
- Plan on renting the home or using house hacking to live rent-free.
- Is in a location in which you can buy at a low price and the house will gain in value. This is more of a judgment call and returns cannot be guaranteed.
Homeownership can be a source of wealth for lower-class families, but it is not the only way to build wealth and is often a common investment mistake many people make.
Not investing in the stock market early enough
Is there anything better than compound interest? Yes, but not much. Many people make the common investment mistakes of not investing early enough into the stock market. Essentially, compound interest makes your money grow more and more over time. The earlier you contribute to buying shares in a stock or ETF, the more your money will grow.
People often avoid investing in their twenties due to not having enough money or not realizing the value of investing. In turn, they have to contribute higher sums of money to make up for the lost time. Instead, they could have invested sooner and less and still made the same amount of money or more. Don’t let this be you! You don’t have to wait to invest, starting small can still have a great impact on your future finances. Ali Abdaal talks about the benefits of investing early in this how-to video:
Not investing extra cash
Lifestyle creep has affected us all at some point. The more money you make, the more money you tend to spend. Common investment mistakes like this can be done by anyone. Spending that extra money when you get a new job or promotion instead of investing doesn’t help you. Invest that newly found cash. Setting up automatic payments is a great way to do this.
Also, consider investing extra money you receive from friends and family. That’s free money you can save for your retirement fund.
Not doing enough research on a stock or investment
How many times have you seen an ad about getting into real estate and think “hey, that looks pretty easy and I could turn a profit fast!” The truth behind growing investments like real estate or many side businesses is that they take time and mastery to turn a profit.
Investments like real estate often cause people to work weekends and learn new skills. Not to mention, you also have to act as a landlord to your tenants, which comes with its own set of challenges. Never invest unless you have done thorough research about the investment and have a game plan.
This is also important if you plan on buying individual stocks. If you want to just invest passively without much research, then consider buying ETFs.
Trying to make investment decisions off the market predictions
The market does not care what we think or how we feel about something. It is always going to do whatever it wants. Although you should do your research before buying a stock, you can’t put too much into predictions, nor should you be spooked by a sudden price drop. Most economists and experts recommend that you buy when prices are low and sell when they are high. That’s it.
Don’t let a sudden market spook let you commit one of the common investment mistakes. Plan for the long haul.
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