When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
Top investing mistakes to avoid
Top investors not only make good choices but also avoid poor choices. Mistakes can happen when investing, but the difference is that good investors learn from and avoid repeating them.
As human beings, it seems there are some investing mistakes we are all destined to make. If possible, the best way is to learn from the mistakes of others.
As human beings, it seems there are some investing mistakes we are all destined to make. If possible, the best way is to learn from the mistakes of others.
Big ideas
- This article outlines 13 of the most common mistakes investors make. If you can avoid these you stand a much better chance of successfully building your wealth.
- What’s better than learning from your mistakes? Learning from ones you haven’t made yet!
Top 13 beginner investing mistakes
According to a study conducted by Charles Schwab, 15% of all current US stock market investors only started in 2020.
Beginners are the most prone to make investing mistakes, but more experienced investors will often unwittingly repeatedly take decisions that impair their performance.
In many respects, learning how to do something new is trying it for the first time, making mistakes, learning from those mistakes and continuing to practise until you can do it with little to no mistakes. Whether it is learning the piano or learning to invest, the process will be similar.
Where investing is a little different is that making mistakes can cost you money, and avoiding mistakes can save you money. That’s why it pays to learn through study as well as experience.
Beginners are the most prone to make investing mistakes, but more experienced investors will often unwittingly repeatedly take decisions that impair their performance.
In many respects, learning how to do something new is trying it for the first time, making mistakes, learning from those mistakes and continuing to practise until you can do it with little to no mistakes. Whether it is learning the piano or learning to invest, the process will be similar.
Where investing is a little different is that making mistakes can cost you money, and avoiding mistakes can save you money. That’s why it pays to learn through study as well as experience.
Watch our video
What are the common mistakes made by investors?
There are many more mistakes that are possible to make that are not included here, however, these are some of the most commonly made investing mistakes- making them the ones most important to be aware of.
1. Overestimating your ability
Assuming you are a great investor, especially as a beginner without a proven track record, is a dangerous mindset to fall into.
This mistake is most commonly made during bull markets because that is when the stock market is most kind to us when prices overall are going up. Investors in a bull market can be tricked into feeling invincible and perhaps better at investing than they really are. While it is possible to gloss over this mistake during the bull market, markets go down as well as up, and this mistake can be a new investor’s undoing when a bear market begins.
This mistake is most commonly made during bull markets because that is when the stock market is most kind to us when prices overall are going up. Investors in a bull market can be tricked into feeling invincible and perhaps better at investing than they really are. While it is possible to gloss over this mistake during the bull market, markets go down as well as up, and this mistake can be a new investor’s undoing when a bear market begins.
2. Thinking you need to be “rich” to invest
You don’t need a lot of money to start. This is one of the simplest investing mistakes to avoid. With Trading 212, you can invest commission-free with as little as £1, so waiting to have more money is not a valid reason to delay getting started.
Every investor has to start somewhere, and thanks to the power of commission-free investing and fractional shares the best time to start is almost always now. You are able to invest in Apple (AAPL) and other global and UK-domiciled stocks by buying just a fraction of the whole stock price. Compound interest, the snowball effect that comes from investing over time, is a powerful thing.
If you want to invest in Apple shares, for example, £50 invested every month can turn into over £40,000 over 30 years at 5% growth a year.
Every investor has to start somewhere, and thanks to the power of commission-free investing and fractional shares the best time to start is almost always now. You are able to invest in Apple (AAPL) and other global and UK-domiciled stocks by buying just a fraction of the whole stock price. Compound interest, the snowball effect that comes from investing over time, is a powerful thing.
If you want to invest in Apple shares, for example, £50 invested every month can turn into over £40,000 over 30 years at 5% growth a year.
Disclaimer: This is just an example. Past performance doesn't guarantee future results.
3. Not having an emergency fund
Before you invest you should aim to have savings that will cover 3 to 6 months' worth of essential expenditures. This should be in a checking or instant-access savings account so that you can easily get the funds when needed.
That way, when the boiler stops working or your car breaks down you won’t need to pay for the repairs by selling some of your investments. The emergency fund acts as a safety buffer between your everyday needs and your longer-term goals. This should form a key part of your pre-investment planning.
That way, when the boiler stops working or your car breaks down you won’t need to pay for the repairs by selling some of your investments. The emergency fund acts as a safety buffer between your everyday needs and your longer-term goals. This should form a key part of your pre-investment planning.
4. Not knowing your investing goals
You must take the time to understand yourself, your needs and your wishes. Understand what you are investing for. You aren't doing it simply to make money, it's what that potential extra money represents and what it could do for you that's important.
EXAMPLE
Let's say you want to invest in Apple shares from the UK.
The decision of whether to invest in Apple shares today depends on your financial goals. If you are early in your career and focusing on capital appreciation, you must decide whether AAPL stock price will continue to rise. However, if you are approaching retirement and are prioritising income, you would need to look at the dividend yield for Apple and see how it compares with other stocks.
The decision of whether to invest in Apple shares today depends on your financial goals. If you are early in your career and focusing on capital appreciation, you must decide whether AAPL stock price will continue to rise. However, if you are approaching retirement and are prioritising income, you would need to look at the dividend yield for Apple and see how it compares with other stocks.
A good example is investing towards your retirement. A good investment plan buys the most valuable commodity of all - ‘time’. An extra income can give you the flexibility to choose when you work and when you stop working altogether (and retire). Having a clearly defined goal like this makes you far more likely to stay on track. Ask yourself, how much do I need and by when - that’s your goal.
On a side note, with Pies&AutoInvest, you can choose from thousands of trading instruments to put in your pie and set goals which match your budget.
On a side note, with Pies&AutoInvest, you can choose from thousands of trading instruments to put in your pie and set goals which match your budget.
5. Investing money you need in the short term
If you’ve got spare funds to invest but you know that you need it back within 5 years, don’t invest. Who knows what the market will do over 5 years? There are a lot of unknowns that can affect market performance in the short term.
Putting away funds for a big purchase in the next few years is really part of your savings and not investments. It’s important not to conflate the two. Savings should be kept secure to make sure they are available when needed. Investments can involve more risk, which is why a longer-term perspective is needed.
Putting away funds for a big purchase in the next few years is really part of your savings and not investments. It’s important not to conflate the two. Savings should be kept secure to make sure they are available when needed. Investments can involve more risk, which is why a longer-term perspective is needed.
6. "Top investing tips" from the wrong place
Be wary of what you are watching on YouTube and social media. You should be doing your own research and be comfortable with what you are buying and why. Or alternatively, seek professional financial advice from a qualified and regulated financial advisor if you’d rather someone did your investing for you.
Whatever you do, don’t take investment advice from the guy down the pub or the people twerking on TikTok!
Whatever you do, don’t take investment advice from the guy down the pub or the people twerking on TikTok!
7. Chasing trends & buying past performance
Past performance is not a guide to future performance.
That isn’t just a regulatory statement, it’s also true. Just because a stock, investment style or asset class did well last year does not mean it will do well this year. You need to take some time for due diligence. If an investing theme interests you, analyse what kind of growth the market is already pricing in this area.
When it comes to individual companies, if you are hearing about some amazing stock that has jumped 100% in price over a short time period accompanied by lots of hype, it’s probably already too late to invest. The best investment opportunities tend to involve owning valuable assets before they become popular at a lower price and selling them once they are popular at a higher price.
That isn’t just a regulatory statement, it’s also true. Just because a stock, investment style or asset class did well last year does not mean it will do well this year. You need to take some time for due diligence. If an investing theme interests you, analyse what kind of growth the market is already pricing in this area.
When it comes to individual companies, if you are hearing about some amazing stock that has jumped 100% in price over a short time period accompanied by lots of hype, it’s probably already too late to invest. The best investment opportunities tend to involve owning valuable assets before they become popular at a lower price and selling them once they are popular at a higher price.
8. Not diversifying
PROVERB
Don’t put all your eggs in one basket.
If you don’t diversify you’re taking more risk than someone who is diversified.
Invest in different companies, in different sectors and in different geographies. The broader the types of investments you make, the better protected you are from one bad event. This also serves to make investing a lot less stressful too.
Luckily, you can choose from more than 13,000 trading instruments from the UK and the rest of the world to diversify your portfolio. Not only that, but with Pies&AutoInvest you can fully automate your diversified portfolio and create an investing plan that matches your goal and budget while maintaining control.
Luckily, you can choose from more than 13,000 trading instruments from the UK and the rest of the world to diversify your portfolio. Not only that, but with Pies&AutoInvest you can fully automate your diversified portfolio and create an investing plan that matches your goal and budget while maintaining control.
9. Constantly watching markets
Too much data can be a temptation to interfere with your investments. Things are changing all the time and there is always more news but most of the time it will not affect a sensible long-term investing thesis. If your investment goals are long-term, rarely does it make sense to change them because of changes in circumstances in the short term. There is no need to check your investment performance every 5 minutes if your investing time horizon is 5 to 25 years.
If you were running a marathon, would it make sense to track your mileage in quarter-mile increments?
If you were running a marathon, would it make sense to track your mileage in quarter-mile increments?
10. Waiting to invest
If you’re waiting for the perfect time to start investing, you’ll never find it. It just doesn't exist. As long as you are playing the long game, the earlier you start investing the better. When you zoom out and look at a long time horizon, markets have historically gone up more than they have gone down. That means you want to be involved with a position in the markets for as long as possible.
11. Lack of patience
Investing is not a get-rich-quick scheme! A lack of patience can lead to some of the biggest investing mistakes. Get comfortable with the idea of sacrificing the short term in order to give yourself the potential for profits in the long term.
12. Being Emotional
Quote
“Be fearful when others are greedy, and greedy when others are fearful.”
Emotional investing mistakes can be some of the most costly. Our emotions can be hard to control, especially when markets are falling and you’re watching the value of your investments go down. You have to accept there will be difficult periods and don't let them distract you from your financial goals.
13. Not understanding what you bought
Legendary investor Peter Lynch said if you can’t explain to a 10-year-old in 2 minutes or less why you own what you own - it’s a mistake. You need to understand the reason behind your decision to invest in something. Once you understand an investment, it gives you the confidence you need to hold it for the long term or sell it if circumstances change.
For instance, if you are an Apple fan, passionately follow their events and monitor the business closely, investing in AAPL Nasdaq might be a good consideration in order to avoid the last mistake on this list.
For instance, if you are an Apple fan, passionately follow their events and monitor the business closely, investing in AAPL Nasdaq might be a good consideration in order to avoid the last mistake on this list.
Recap
One of the best ways to become a successful investor is to learn from the mistakes of others. By understanding common investor mistakes, you can avoid making them yourself and improve your chances of achieving your investment goals.
Some of the most common mistakes investors make include failing to diversify their portfolio, chasing after hot stocks, and letting emotions influence their decision-making. By being aware of these pitfalls, you can avoid them and put yourself in a better position to succeed.
Of course, even the best investors make mistakes from time to time. The key is to learn from them and move on.
Some of the most common mistakes investors make include failing to diversify their portfolio, chasing after hot stocks, and letting emotions influence their decision-making. By being aware of these pitfalls, you can avoid them and put yourself in a better position to succeed.
Of course, even the best investors make mistakes from time to time. The key is to learn from them and move on.
- Bull Market: A market condition where stock prices are rising, typically driven by strong investor confidence and economic growth.
- Bear Market: A market condition where stock prices are falling, usually by 20% or more, often accompanied by economic downturns and pessimism.
- Trading Instruments: Various financial assets that can be bought and sold in the market, including stocks, bonds, ETFs, commodities, and derivatives.
- Emotional Investing: Making investment decisions based on emotions like fear or greed rather than rational analysis, often leading to poor outcomes.
