Don’t Make These 5 Investing Mistakes

The stock market has been on a crazy rally since March 2020. This caused a lot of people to stay on the sidelines as they thought the market was over-extended. However, some people decided to try their luck as almost every stock was trending upwards.

Unfortunately, many of those people lost a lot of money when the market decided to correct itself. This is because they did not understand the market's fundamentals and were practically gambling with their money.

But since we are now in a bear market and recently entered a recession, this is every investor’s dream to get into the market.

I mean, the entire market is on sale. If you are adopting a long-term investing strategy, entering the market when all the charts are trending downwards and red is the best you can do.

However, there are a few things you can do to ensure that you continue to stay profitable from the beginning of your investing journey.

This is why today I will discuss the top five investing mistakes beginners make so you can avoid them.

Quick Takeaways

• Don’t wait too long to start investing your money.
• Identify your investing strategy and stick with it.
• Invest in your favorite stocks and ETFs on a dollar-for-dollar basis.
• Make sure you have an emergency fund and zero credit debt before investing.

1. Not Getting Started

By far, the most common mistake I see is that people are either waiting for the market to drop even more because they think the market’s free fall will last forever or they are waiting too long to invest.

If you are betting on the market dropping, then you are making a big mistake because timing the market is extremely difficult. It is better to get into the market by dollar-cost averaging (DCA) and continue to contribute to the market whether it continues to fall or recover.

If you are waiting on the sidelines to see how the market behaves, then you are also making a big mistake. People who wait too long often find the market is recovering to levels they did not expect.

This leads to emotions taking control of you and you experience FOMO (fear of missing out), so you end up purchasing on the uptrend and miss out on the lowest levels of the market.

This can really hurt the potential returns you can make by taking advantage of the price crashes.

Historically, the bear market lasts an average of 289 days, about 9 months, and the bull market lasts about 991 days, about 2.5 years.

2. Not Having an Investing Strategy

This is a mistake that I fell prey to at the beginning of my investing journey.

Getting into the market without a plan is like setting your money on fire. I mean, if you really want to get rid of it, just give it to me and I will gladly take it 😉

I see many investors start investing thinking they are going to buy low and sell high. It sounds easy, but it's a lot harder to execute.

What ends up happening is that they get into a stock trade, thinking they will be in it for a couple of days and they will make a quick profit. But then the stock goes down and then down some more, to the point that they have now lost 20% or more of their initial investment within a few weeks.

Suddenly, their strategy changed from being swing traders (holding a stock for a short period of time for a quick profit) to being long-term investors (because they have no other choice but to hold the stock until it recovers to the price they initially bought it at).

Please do not become this type of investor because it is costly. You will lose money, and it will be an expensive lesson.

I always recommend that you identify the strategy you will adopt before starting and sticking with that strategy. My personal strategy is to dollar cost average into my favorite stocks and ETFs.

3. Investing a Lump Sum Amount

Most experts recommend utilizing the whole amount you have to invest all at once since the market is generally always going up. However, I differ from that point of view.

Let’s say that you have $10,000 to invest. You decided that you wanted to be a long-term investor, so you bought $10,000 into an index fund that tracks the market. Now, you are sitting back, relaxing, waiting to see your investment grow.

Unfortunately, it does not! It is actually going down because Russia decided to have a war with Ukraine. Then it continues to drop even more because oil prices have skyrocketed. Now your emotions start to get a hold of you as you see your $10,000 drop to $9,000.

What is worse is if the market drops even more because inflation is on the rise and at the highest it's ever been in the last 40 years. Now your investment decreases to $8,000.

You do not have any more money to invest to average down the price you bought at, so you are left with your emotions telling you to sell.

Unfortunately, many investors go through this process. Although this is all hypothetical, we never know what the future might hold for the market.

This is why I recommend that if you are a beginner getting started, adopting the dollar-cost average strategy may be the best option.

This means that you invest a certain amount on a daily, weekly, or monthly basis regardless of how the market is performing. Thus, you will continue to buy whether the price is going up or down.

This is beneficial because, since we cannot time the market, you will be buying at different price points. If the market continues to drop, then you will be buying shares for cheaper and averaging down the price you bought them at.

If the market goes up, you will be up on your initial investment and you will be averaging the price you bought it at.

Using the aforementioned $10,000 example, one way of going about it is by putting in $3,000 to start and then continuing to invest $1,000 on a monthly basis. Or starting with $5,000 and then putting in $500 every week.

There are many ways of going about it; just choose something you are comfortable with. Just make sure that you gradually increase the amount you are investing over time.

4. Depleting Your Emergency Fund

Another common mistake I see people make is that they want to take advantage of a correction, market crash, or recession by using the money in their emergency fund to invest.

This is a big mistake and I hope you do not make it. An emergency fund is for one thing only: emergencies! You do not want to be in a situation where life throws a curveball at you and you are not prepared.

If you were to be laid off from work, something happened to your car that needs immediate fixing, or hospital bills are way out of your budget, what are you going to do if you don’t have an emergency fund?

And don’t tell me that you will put it on a credit card because that is worse than not having an emergency fund.

Make sure that you have an emergency fund that will support your lifestyle and expenses for 3-6 months (at minimum) before you start investing.

5. Investing While Being in Debt

Finally, I want to talk about how beginners are usually so excited to get into the market that they do not evaluate whether they are in a position to invest or not.

Investing in a broad market index fund will generate roughly an average return of 8% on your money. This is a great way to grow your money over time.

However, if you are in debt or have loans with interest rates exceeding the market’s return, should you really be investing?

The answer should be a clear no. But let’s break it down anyway.

Say you have a credit card debt of $1,000. You have the $1,000 cash and can afford to pay it off, but your friend is telling you about how much money he made investing, and you would be a fool if you did not invest your money.

Considering that the average interest rate for credit cards is 15-20%, you should be paying more in interest than you are making in the stock market.

This is why it is important to clear out your debts that have interest rates higher than 6% before investing your money.

Conclusion

It is great that you are thinking about starting your investing journey. Those tips will help you avoid common mistakes beginners make when they start their investing journey.

Just remember to control your expectations and emotions when entering the stock market.

Have a great week!

Muhamed

📖 Quote of the Week

The way of success is the way of continuous pursuit of knowledge

From Think and Grow Rich, By Napoleon Hill