Jumping into the world of investing can be overwhelming for many new investors, especially in a rapidly changing market. But it’s something a growing number of people are doing.
One survey found that 15% of all U.S. stock market investors got their start in 2020, meaning a new generation of investors is rising.
With stock markets turning toward bearish territory, it’s never been more important for new investors to understand their financial goals and opportunities and for advisors to know common pitfalls that could impact their clients.
Here are five common mistakes made by new investors:
Mistake #1: Not Setting Clear Financial Goals
There isn’t a one-size-fits-all approach to investing. Success comes from tailoring an investing strategy to meet each person’s individual needs. But when investors don’t have clear goals, they don’t know what they are trying to achieve and can’t create a portfolio that will provide long-term returns. As a result, they often end up floundering, following trends, or jumping between investments until they find something that sticks.
When investing or working with new investors, be clear on their goals and timetable. Are they retiring in five years or 25? Do they have balance amounts they want to hit or purchases they want to make? Clear goals provide direction in a complex investing world.
Mistake #2: Not Understanding the Market
Similar to having unclear goals is having unrealistic expectations. Many investors see people sharing their great financial successes and think they can instantly see the same results. But investing is most often a long-term game with countless variables. Markets are unpredictable, and investors need to understand the risks and rewards of investing. A clear understanding of when and how a portfolio will grow and see returns can transform the investing experience.
Lasting returns don’t come overnight. But new investors are often so anxious to see a return that they don’t take a slow and steady approach that can lead to long-term returns. Too often, investors give up too quickly, even after days or weeks, if they don’t see an immediate and dramatic return. Understanding the market and having clear expectations makes it easier for investors to be patient and wait for better results.
Mistake #3: Focusing on One Type of Investment
Experts agree that the most prudent — and likely most effective — approach to investing is to create a diverse portfolio, especially for new investors. The general rule of thumb is not to put more than 5% to 10% of a portfolio in any investment. Instead, aim to spread the portfolio across 20 to 30 investments of varying risk.
Putting all the eggs in one basket makes a portfolio vulnerable to extreme growth and dramatic plummets. In contrast, a diversified portfolio tends to follow the market and lead to more significant overall growth.
Mistake #4: Letting Emotions Get in the Way
Investing is as much an art as it is a science, and sometimes emotions get in the way. With the ups and downs and twists and turns, it’s easy for new investors to get caught up in the feeling of the experience. Those emotions, whether positive like greed or negative like fear, can impact investment decisions and lead to rash choices instead of being strategic. A measured approach allows for proactive decisions instead of reacting emotionally to every threat or trend.
Mistake #5: Getting Information from Unreliable Sources
In today’s hyper-connected world, everyone has opinions about the right investments and what’s coming down the pipeline. But not all advice is created equally. New investors often fall into the trap of getting information from sub-par sources instead of doing their research and talking to trusted professionals.
Chasing trends alone isn’t an investment strategy, nor is sourcing all recommendations from social media. The most successful investors do their due diligence and find trusted and reputable sources for investment advice. Sound advice comes from people who know their financial situation, not from someone giving general guidance to the entire internet.
Especially as a new wave of investors enters the market, setting financial goals and listening to trusted advice can help people avoid making costly mistakes. Successful investors turn to trusted advisors to guide them through the process and avoid these common mistakes.
