The investing world is going through some turbulent times, but those who can successfully navigate this investing environment and avoid making critical mistakes stand to make great profits. After all, the opportunity is greater when times are tougher. So how do you avoid making big mistakes?
Below is a short list of the most common investing mistakes, in both action and mentality.
1. “I don’t have the time to invest. Investing is too complicated.”
Investing is the art and science of making your money work for you. You can just work for money your whole life, or you can have your money do its fair share by working hard for you.
If you don’t look after your own money, no one else will. No one will care more about your finances than you do. Since you’re responsible for your own finances, you have to understand financial and investing principles in order to build wealth. If you have time to work, you have time to devote to learning personal finance and investing. It’s worth it. Your wealth is literally at stake.
2. Getting greedy and fearful of missing out on big investment returns.
Possibly the greatest and most common sin in investing. Also called FOMO (Fear Of Missing Out) investing. Also known as speculating, or investing on hype. This often happens when people get jealous from seeing social media posts, listening to friends, hearing a tip from a co-worker or acquaintance, etc. The paths that lead down this dark road are numerous, but they lead to the same outcome – losing money and learning an expensive lesson.
This happens to almost everyone, even some seasoned investors, so it’s important to guard against it. It’s difficult to watch people post about 100% or 1,000% gains and still feel satisfied. The key is to understand that it’s almost always a facade. Everyone loves to post on social media or tell their friends when they make a ton of money. Curiously, they go silent when they lose a ton of money, which is almost inevitable when you invest in many high-risk investments.
Symptoms to watch out for:
– Not understanding the investment
– Not doing enough due diligence and research
– Feeling greedy, envious, unsatisfied, or FOMO
– Using social media too frequently
– Focused on the latest trends, crazes, and fads
3. “Investing is like gambling. The market is rigged by big players. All you can do is hope for a win; you can’t do much about the risk.”
To be honest, this mentality is usually kind of lazy. It presupposes that the market’s already rigged, which naturally leads to the conclusion that you can’t do much about the risk.
The easiest way to disprove this is to point out people who have consistently been successful in investing. You can’t have a consistent track record if it’s all based on chance.
Investors have a responsibility to themselves and their finances to do whatever they can to control, reduce, and limit the risk factors in any given investment. Doing everything you can to limit your risk leads to better, more predictable investment outcomes. It limits your chance of losing money, limits the amount of potential losses, and helps increase your returns.
Do things the smart way – think through everything and do your due diligence.
4. Investing in what you don’t understand.
Don’t put your money in things you don’t understand. No matter your level of wealth and sophistication, you and your advisors don’t know everything. Many billionaire and multimillionaire clients I know simply pass on investments that are too complex or difficult to understand. They also pass for investments outside their comfort zone or investment criteria.
Day trading, options, alternative coins in crypto, and meme stocks are usually not great ways to make consistent side income and get rich quick—except for the people promoting these strategies. There are, of course, exceptions, but that’s not the average outcome.
Think hard about what could go wrong, because all investments carry risk. You should make any investment with both eyes open—understanding what the risk factors are, how likely the investment is to hit its expected return, and being comfortable with the risk profile of the investment. Investors usually run into trouble when they skip these steps and just hope for the best.
And that’s not what we do here as smart investors!