Getting into investing can be intimidating. Between movie stereotypes, such as those in “The Wolf of Wall Street,” and that story about your neighbor’s cousin’s sister’s aunt who lost her life savings on the stock market, it’s hard to know which advice to stay away from and which to follow.
From acting on hunches to not diversifying, here are four investment mistakes and myths to avoid.
1. Invest only in what you know
When you’re starting to invest, it makes sense that you might want to stick close to home and exercise your company’s stock option or stay within industries with which you’re familiar.
The truth: While that’s not a bad strategy overall, it could harm your portfolio in the long run to have too many similar investments. If there’s a downturn in your chosen industry, all your eggs would be in one basket and at risk.
“I like the concept of investing in what you know, but a lot of people don’t know enough things to make that a well-diversified strategy,” said Mike Scanlin, a venture partner with Mistral Venture Partners who also runs a website that helps people invest.
“There [are] things you are familiar with and have some expertise on, and then there [are] things that you’d have no idea how they work unless you did your doctorate in that area, like cancer therapy drugs, for most people,” he said.
But not everything fits neatly into one of those categories. Some investment knowledge could fall in the middle — sectors that you aren’t into directly but of which you have some working knowledge.
What to do next: If you have investing goals that’ll take you beyond your immediate knowledge, consider working with an adviser who can educate you while recommending which stocks would be best for your portfolio.
Another option is to look into online advisers that try to make financial advising affordable. Here are two companies to consider:
- WiseBanyan: Offers a la carte services and doesn’t charge investment management and trading fees
- Aspiration: Allows clients to decide how much they pay in fees
Whichever route you take, it’s best to compare advisers online before making a commitment.
2. Diversifying is only for bigger investment portfolios
If you don’t have a lot of money to invest, it might be tempting to hold off on diversifying your portfolio until you have more funds.
The truth: “Don’t put all your eggs in one basket,” said Scanlin. “Stay diversified. If you don’t have enough money to buy stocks across different industries, buy one thing — an ETF.”
An exchange-traded fund (ETF) is a group of investments in one fund. When you buy an ETF, you have a small stake in all the assets in the fund. In this way, you can diversify without having to invest a lot of money. But if you’re investing only a small amount of money, make sure the transaction costs of each sale or purchase don’t eat away at your bottom line.
What to do next: If you want to try buying ETFs, you could start by using Acorns. This micro-investing app lets you invest your spare change in ETFs. Once you sign up and connect your bank account to let the app track your spending, it can invest your money using a number of methods, including by automatically rounding up each purchase and investing the difference or by making automatic investments on a set schedule.
3. Invest only with your gut feeling
When an exciting new company seems to be taking off, it could be tempting to invest in it, especially if you think you’re ahead of the curve.
The truth: Hunches sound exciting, but they’re rarely stable. Instead, develop what Scanlin calls “a well-researched investment thesis,” which involves looking at not just the company but its global competitors as well.
“It’s a lot of trial and error,” said Scanlin. He suggests keeping your investing positions small if you’re starting out and trying to learn the market.
Scott Eichler, the vice president of institutional wealth management at Newport Wealth Advisors and author of the book “Don’t Play Chicken with Your Nest Egg,” regularly researches different stocks for his clients. “If it’s a public stock, it’s relatively easy,” he said. “Everything is in the public sector. You can find just about anything you want on search engines.”
For companies that are private, he uses a proxy — a similar company — to make projections and then confirms his investment hypothesis using white papers or speaking to researchers or experts.
What to do next: Finding a financial adviser who has experience in the markets you’re thinking of investing in might be a helpful step. If you want to take a do-it-yourself approach, it’s important to do a lot of research in the markets you’re interested in — reading white papers, following the news, and even interviewing your own primary sources.
4. Wait to invest until you’ve saved a lot of money
It might not seem worthwhile to start investing if you don’t have a lot of money saved. And you could be tempted to put it off until you feel your cash will have a bigger impact.
The truth: Saving and investing a small amount from every paycheck helps develop good money habits, even if your investments aren’t earning huge returns at first.
“If you can only invest $25 a month, do it,” said Eichler. “When it comes to the point where you have to save $50 a month, it’ll become easier.”
This strategy becomes particularly important when investing in preparation for something like retirement, as seen in this example:
You can earn money on many investments based on compounding returns when you reinvest your earnings repeatedly over time. “Compounding returns never work until you add time into the equation,” said Eichler. So, the sooner you get started, the better.
What to do next: If you’d like to start investing now, it doesn’t take a lot of money to get started. In fact, you can invest in stocks with $100 or less. One such technique is micro-investing. Apps such as Acorns can make it easy to start investing from your phone.
Avoid common mistakes
As you grow as an investor, you probably will experience a mix of successes and losses. But there are a few basic mistakes you can try to avoid if you create a sound strategy based on research and improving your knowledge.
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