Four beginner investor mistakes (and some ways to avoid them!)
14 May 2021
Mistakes are part of learning anything new—investing is no exception. When you’re getting started as an investor, you’re bound to make a few mistakes here and there as you figure out what you’re doing.
Let’s look at some of the more common pitfalls that new investors fall into. If you can avoid these, you’ll be well on your way to making investing a positive habit that you stick to for the long term.
Mistake #1: Selling too much, too soon
A common mistake first time investors make is to take all their returns at once when things start to increase in value.
This makes sense on the face of things - if you make a solid return, quickly, then why wouldn’t you turn this into cash by selling up?But if you do that, you may be missing out on future gains, if your investment continues to rise in value.
(That’s a big “if”- it could stay the same, or fall).
But if you’re comfortable with the risk you’re taking and the fundamentals of the product you’re investing in, you may want to leave some of your money invested. You can sell enough to make some return, or get back what you initially invested, then leave the remainder invested. If it goes up, you get even more returns - and if it goes down, you still have the returns you cashed out earlier.
Of course, it’s important to stress that you should only do this if you’re comfortable. It’s not necessarily a mistake to sell everything - but it might be a mistake to sell everything without thinking about other approaches.
Mistake #2: Not selling fast enough
We talk a lot about investing for the long term. But here’s the reality - it’s not always the best option, particularly when you’re investing in individual companies.
If an investment is dropping in value because the company you’ve invested in isn’t doing very well, then it sometimes makes more sense to take your losses and cash out than it does to hang on. If you’re going to do this, then it makes more sense to do so quickly, rather than wait for your losses to become even greater.
The risk of doing this is that you sell, things turn around, and you don’t get the upside. So you have to ask yourself if you think an investment is in a temporary dip, or a downward spiral. If it’s the latter, selling now makes more sense than selling later.
Mistake #3: waiting for the bargain that never comes
If you look at the ups and downs of the share market, it’s easy to see (in retrospect) where the best buying opportunities were. Wouldn’t it be great to invest when shares are $1, and immediately have them shoot up in value to $3, $4 or more?
The problem with this is that bargains are very obvious in hindsight, and very hard to find ahead of time—unless you have a crystal ball. So you can end up waiting for the price of your investment to fall just a little more every day before you take the plunge. Next thing you know, it goes up, and you’ve missed out again!
How to avoid this mistake
Rather than trying to wait for bargains and time the market, one strategy is to invest the same amount, on a regular basis—also known as dollar-cost averaging. This means that sometimes you buy when prices are high, and sometimes you buy when prices are low—over time, your purchase price of each investment averages out, and you don’t have to worry about whether you got a bargain or not.
Mistake #4: thinking you need to be rich
Some would-be investors avoid investing because they think you need to invest a lot of money. If you don’t have a lot of money, why bother?
But remember that you don’t need a lot of money to be an investor. You can invest a little bit for the short or long term, and still have a chance at making some returns.
This gets really cool when you think about potential compound returns. Compound returns are great because you don’t need heaps of money, you just need to have heaps of time. So the longer you wait to invest, the more potential compound returns you give up, and the sooner you invest, the more potential compound returns you get. It’s a real win/win (as long as your investments give a good return).
How to avoid this mistake
Remember that even a small amount invested is more than $0 invested! Choose an affordable regular amount, stick to it, and if you want to invest for a long time, might like to have a go at getting some compound returns.
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.