5 Investing Missteps That Most New Investors Make
Many of the missteps you can wind up making when it comes to investing occur before you even get started. Here’s how to overcome the most common investment mistakes that inhibit people’s ability to invest successfully.
With a little knowledge or some help from a financial advisor, many of the investment mistakes new investors make can be largely avoided. That’s the good news. The not so great news is that most people aren’t aware of the psychological barriers inhibiting their ability to invest successfully in the first place until it’s too late.
Good thing you’re reading this article today.
Here are the five investing missteps that most new investors make and how to avoid them.
Relying on Investment Advice from Friends & Family
Your friends and family may have the very best of intentions, but that doesn’t make them qualified to instruct you on ways to invest your wealth. Watching just one episode of CNBC’s American Greed puts this advice to the test with “get rich quick” schemes. One friend or family member invests in what seems to be a perfectly legitimate investment that promises big returns. They convince friends and family of this great new investment and before long everyone is victim of a bad investment.
Why does this happen? Because trust in our close peers can make an investor blind to possible misinformation, myths, crackpot theories, and bad investments.
Only a trained, fee-only financial professional can analyze your particular financial situation and provide objective advice that’s based on research, facts, and prevailing wisdom.
Trying to Do it On Your Own
Education and active participation in your investment strategy is positive, especially when combined with the financial expertise of a trained financial advisor. For some people, the DIY-only method works, but they’re not your average investor. Trying to do it on your own when you’re not sure what you’re doing can lead to costly consequences.
Instead, consider hiring a financial advisor. Financial advisors not only advise you on how to invest, but how much and when. They’ll make investment recommendations based on your total financial picture, ensuring that you invest where it makes the most sense for you and your personal situation.
Ignoring Risk or Not Understanding Risk
Understand something, nothing in life is certain, especially investing. Every investment comes with risk, some more so than others. A financial advisor will make you aware of the level of risk associated with investments and minimize your exposure to risk as best they can. Most of us, unless we’re day trading for sport, don’t want to gamble with our money.
Diversification is one such way that a financial advisor minimizes your risk by spreading investments across asset classes so that your eggs aren’t all in one basket.
Not Arming Yourself with Financial Education
Even if you do end up hiring a financial advisor to help you manage your investments, it’s still good to know your terms and your options. What types of investments are out there? What types of investment advisors exist to help you?
Knowing what a mutual fund is versus a stock, for example, will go a long way towards your understanding of what a financial advisor is going to do for you, since these are most likely some of the types of investments they’ll be setting up for you. Increasing your financial literacy will only help you to have a better understanding of your investments and prepare you to ask the right questions.
Not Understanding Your Money Personality
One of the first things a financial advisor or even a robo advisor will ask you is how you feel about risk. Your tolerance for risk is a major determining factor in how our investment portfolios are constructed.
Risk tolerance is determined by a few factors, such as how close you are to retirement and what you are trying to accomplish with your wealth. Your money personality is how you feel about money, what causes you the most anxiety, and what will cause greater financial security for you.
Knowing your money personality will help a financial advisor to build an investment strategy that most closely aligns with your needs and according to your psychological comfort zone.
Anjali Jariwala is the founder of Financial Investment Tax Advisors, a fee-only financial planning firm serving clients across the United States. Young professionals who are ready to build wealth are often met with obstacles from the very industry that should be helping them. FIT Advisors is a trustworthy alternative to the status quo. We serve physicians and business owners in the wealth accumulation stage as their financial life coach.
Anjali and I became friends through NAPFA and I asked her to write some thoughts on investing missteps as a guest topic for this site.