When it comes to saving and investing, getting started is often the hardest part. It is easy to put off opening a mutual fund account, investing in your 401(k) at work or creating a retirement plan, but the sooner you get started the better off you can be.
One of the most frequently expressed regrets of long-term investors is that they did not start soon enough, but simply getting started is not enough. New investors are particularly susceptible to a number of dangerous mistakes, including the five big ones listed below. Avoiding these common investing mistakes can save you a lot of money and help you build long-term wealth for the future.
The beginning investor may think that buying 100 shares of stock for a buck is a great idea, but penny stocks are fraught with peril. These low-priced stocks are minefields even for experienced investors, and beginners are very unlikely to pick the one or two winners from a field of losers. These companies are much more likely to go out of business and stop trading altogether rather than make you a ton of money.
Beginning investors do not need a ton of money to get started, so there is no reason to play in the penny stock arena. Some mutual fund companies let buyers invest as little as $100 a month, and a diversified investment in a well-managed mutual fund will probably have a much brighter future than the average penny stock.
Going to the casino may be fun, but you should not confuse it with making a sound investment. Even so, many new investors blur the line between investing and speculating, and the results can be pretty dismal. Buying into a risky stock based on a comment you overheard at a cocktail party or social gathering is not investing - it is gambling.
If you have the money to bet on a few high-flying stocks, more power to you, but do not confuse that process with building a solid portfolio. Investing should not be exciting. The goal is to build long-term wealth, and by its very nature that takes time. If you need some excitement in your life, take a few bucks and go to the racetrack, then come home and work on your investment strategy.
It is not uncommon for new investors to confuse short-term and long-term investments. The distinction is all about when you expect to need the money. If you expect to need the cash within the next 5-7 years, it does not belong in the stock market. While stocks have enjoyed superior returns over the long run, they have also undergone some pretty scary pullbacks.
Investing short-term money in the stock market could mean taking a big loss when you need the funds. Separating your short-term and long-term investments is essential, but it is also something many new investors learn too late. You can avoid making the same mistake by keeping your short-term money in money market funds - or a simple savings account.
Another big mistake beginners make is buying single stocks. If you pick the right one, you stand to make a lot of money. If not, you could lose it all. For every Apple and Microsoft, there are hundreds of Enrons and WorldComs. Investors in those companies learned too late the dangers of putting all their eggs in one basket.
New investors can avoid the dangers of single stock investing by diversifying their cash in quality mutual funds instead. Low-cost index funds allow investors to buy the entire stock market, essentially giving them ownership of thousands of different stocks. That kind of diversification is extremely valuable, since the chances that all those companies will go bankrupt at once is virtually nil.
Putting a lump sum of cash into a solid investment is better than nothing, but consistency is the key to building long-term wealth. Putting a little bit of cash into your investments month after month also allows you to accumulate more shares when prices are down and fewer when prices are up. That buy low sell high approach is a key part of successful investing.
Investment professionals call this strategy dollar cost averaging, and it can be an effective way to build wealth over the long term. It is not hard to invest consistently; all it takes is a bit of discipline. You can set up a monthly transfer from your bank account to your favorite mutual fund or set up a regular 401(k) contribution with your employer.
You do not have to let an investment mistake derail your long-term wealth building strategy. Learning from the mistakes of others is the best way to avoid common blunders, and nowhere is that more true than in the world of investing. Whether you are investing for your own future or that of your children, avoiding these common mistakes is the best way to protect your money and your future.
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