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by Aleksandre Natchkebia on July 18, 2018

Common mistakes made by beginner investors

Investing is not as easy at it may seem at the first sight. People often imagine that the only thing required to be a good investor is money. That’s not the case as many failed attempts have proven over the time. Of course, nowadays, there are various options that people can use that eliminates the need for them to make the investment decisions. Those who have funds they want to invest can simply entrust them to a professional manager, who is better equipped to handle the responsibilities and has the background and experience required to make the right choices. These funds will often have some limits as well and will usually accept investors who have large sums to invest. For this reason and others, smaller investors often decide to go about the whole process on their own. This often leads to several mistakes. Here we list some of the common mistakes beginner investors make so that those who want to get into investing know what to look out for.

Expecting profits too soon.

Investing is not the same as day trading or speculating. It is a longer-term effort and serves more as a tool to keep your funds growing slowly so that your holdings don’t depreciate in value with inflation. Of course, every investor wants to see his/her funds grow more than expected. Nevertheless, this is not something you can expect huge profits from unless you also invest a huge amount of money. Many beginners think that they will see an inflow of cash very soon after they make their investments. When, in reality, the expected results don’t occur, they start to make hasty decisions and mistakes that could be detrimental to their wealth. Consequently, it is important that before making any decisions, the investors realize that they are entering a long-term commitment and will not see their wealth multiply in the matter of several months or sometimes even years.

Not planning for time.

On that note, it is important to decide beforehand for how long you are willing to invest your funds in a certain instrument. This will affect the choices as well, as different products will be more suitable for different terms. If you plan to invest for a longer period of time, you might prefer something that’s less volatile and does not often see sudden changes in price. This way you can be sure that your wealth is safe and will be available when you need it. If you think you might need your funds in a few years, different options could be considered that are more focused on growth. Although, bear in mind that unnaturally large growths always come from unnaturally large risks. In addition to this, knowing beforehand that the invested funds will not be accessible for a certain period will reduce anxiety and the mistakes it leads to.

Failing to diversify.

Diversification is one of the most important things when it comes to investing. It gives the investors the ability to earn profits without experiencing large volatility. What diversifying entails, is investing in different assets that might experience different growth cycles. For example, if asset 1 usually goes up in period 1 but drops in period 2, and asset 2 is the opposite, they will cancel each others’ price movements and eliminate the risk of losing money in certain periods. In addition, investors can choose to include in their portfolio more stable assets that will balance out the overall risk and riskier ones that will drive the growth. Diversifying is not an easy task and should often be entrusted to professionals who have the analytic tools to make the right judgments. For beginner investors, it is an important factor to consider to avoid periods of heavy losses.

Common mistakes made by beginner investors

Ignoring the fees.

Many people, when just getting into investing, are overly optimistic and expect to make large profits. This often leads them to disregard expenses such as fees and commissions. Fees could be paid to a trading platform, a fund manager or other services. Although these fees might not seem sizeable for investors who expect to earn a lot of income, they often make the difference between making a profit and losing on the investment. Consequently, they should be considered very well beforehand. It shouldn’t be too difficult to make the calculations to get the overall view of the expenses beforehand. It might be a little more difficult to estimate the growth of the investments, but if such an indicator were to become available, investors should compare the expenses to the gains and make the decisions accordingly.

Believing the efficient market hypothesis.

The efficient market hypothesis is an economic theory that states that all the available information is already reflected in the asset prices. For investors, this translates as the absence of the power to identify good investment opportunities. If all the information is already reflected in prices, there are no undervalued or overvalued assets so there is no way to know which way the prices will go in the future. While this theory should give the investors a hint on how difficult it actually is to beat the market, there is still some room to distinguish oneself. The efficient market hypothesis is not a good enough reason to abandon research.

Research is one of the most important things to do before investing. This is true for people who plan to find a fund manager as well. Not only is the research required to identify the right investment opportunities, it is also necessary to choose the right platform. While most people do not have the knowledge or experience to analyze the financial instruments in detail, they can get some general information to avoid really simple mistakes. Nowadays, with investing being as popular as it is, there are thousands of videos online and texts that explain the processes in detail and give investors the basic knowledge they need.

Forgetting to rebalance.

Rebalancing is an important part of the investing process and it is why the managers are required to constantly monitor their portfolios and do analytics. Although nowadays many platforms offer the options to automate this process, the logic still has to be put in by the manager. For diversification purposes or other, the managers have chosen a certain balance of the assets in the portfolio. As the time goes on, some assets in the portfolio appreciate in value while others depreciate, so the ratios change. In such cases, it is necessary to sell off come assets and purchase others to keep the ratios the same. This is the process of rebalancing, that beginner investors might forget or ignore because it requires constant attention. Alternatively, they might think that the assets that increased in value should be represented more in the portfolio. While this is a valid point and some managers do, in fact, consider that when rebalancing, don’t forget that the purpose of having several types of assets is to diversify the risk. If the riskier assets take a larger part of the portfolio, the risk of the whole portfolio will be higher as well.

Common mistakes made by beginner investors

Not use the index funds.

As much research as a beginner investor can do, he/she will never achieve the expertise of professionals who have decades of experience. One way to mirror the performance of these professionals is by purchasing index funds. These are funds that have a portfolio that tracks a certain market index like S&P 500. They are used actively by fund managers. They are also a good way to diversify the risk. It is not absolutely necessary to have the whole portfolio comprised of index funds, but they are definitely a useful financial instrument to include.

Choose the right platform.

Today, there are multiple ways people can go about investing their funds. One way is to invest the money in different assets through different channels, but in this case, the accounting, as well as management will be more difficult. It is better to have one place where all of the investments can be controlled from. There are various platforms that offer this functionality. Some of them have better infographics and are more user-friendly, while others offer a wider selection of assets to invest in. A lot of research will usually go into selecting the right platform. Some of the criteria to judge these platforms on include: the ease of navigation, the selection of assets, liquidity and integrations with other providers, security and privacy measures, and much more.

 

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