The following is a post by Miss T who blogs at Prairie EcoThrifter. She grew up in the Canadian prairies and still lives there today. She is passionate about saving money, being healthy, looking out for our environment, and most of all having fun. Her blog shares tips on how you too can live a green, debt free, and fun life.
Smart people sometimes make dumb mistakes when it comes to investing. Trust me, I’ve done it. Part of the reason for this, I guess, is that most people don’t have the time to learn what they need to know to make good decisions. When I first started investing I didn’t know much at all. I often relied on the advice from others. Another reason is that oftentimes when you make a dumb mistake, somebody else—an investment salesperson, for example—makes money which makes the whole situation a contradiction.
In my many years of trying to figure out the ropes of personal finance, I have learned what does and doesn’t work when it comes to investing. Here are 6 mistakes to avoid. Trust me, you don’t want to take the same road I did.
Everybody who thinks about this for more than a few minutes realizes that it is true, but it’s amazing how many people don’t diversify. For example, some people hold huge chunks of their employer’s stock but little else. Or they own a handful of stocks in the same industry.
To make money on the stock market, you need around 15 to 20 stocks in a variety of industries. This is why index funds have become so popular. When you own fewer than 10 to 20 stocks, your portfolio’s returns will very likely be something greater or less than the stock market average. Plus you won’t keep up with the costs of inflation.
This is something I am not good at in any aspect of my life. The stock market and other securities markets bounce around on a daily, weekly, and even yearly basis, but the general trend over extended periods of time has always been up. It’s important for investors to have patience. There will be many bad years, bad days, and bad months. Many times, one bad year is followed by another bad year. What you need to remember though is that over time, the good years outnumber the bad. Plus they compensate for the bad years too. Patient investors who stay in the market in both the good and bad years almost always do better than people who try to follow every fad.
Apart from me, my parents always struggled with this. In fact they sometimes still do. They don’t like seeing the dips daily,monthly, or yearly. It stresses them out too much. They often pull their investment and switch it to something else. All this does is put them further away from their goal. I wish I could talk some sense into them.
Use Dollar Average Investing
You may already know about dollar-average investing. Instead of purchasing a set number of shares at regular intervals, you purchase a regular dollar amount, such as $100. If the share price is $10, you purchase ten shares, etc.
Dollar-average investing has two advantages. The biggest is that you regularly invest—in both good markets and bad markets. The other advantage is that you buy more shares when the price is low and fewer shares when the price is high. As a result, you don’t get carried away and end up buying more stock than you can afford.
Don’t Forget About Investment Expenses
Investment expenses can add up quickly. Small differences in expense ratios and income taxes can easily subtract hundreds of thousands of dollars from your net worth over a lifetime of investing. Investment expenses can add up to really big numbers when you realize that you could have invested the money and earned interest and dividends for years.
Avoid Being Greedy
I like all of you wish there was some risk-free way to earn 15 or 20 percent annually. But you know as well as I do there isn’t. The stock market’s average return is somewhere between 9 and 10 percent, depending on how many decades you go back. You just need to take your time.
I mention this for a good reason: People make all sorts of foolish investment decisions when they get greedy and pursue returns that are out of line with the average annual returns of the stock market. If someone tells you that they have a sure-thing investment or investment strategy that pays, say, 15 percent, don’t believe it. If someone really did have a sure-thing method of producing annual returns of, say, 18 percent, that person would soon be the richest person in the world. The point is: There is no such thing as a sure thing in investing.
Don’t Pretend to Know it All
As a practical matter, it’s very difficult for people who haven’t been trained in financial analysis to analyze complex investments such as real estate partnership units, derivatives, and cash-value life insurance. Financial analysis is nowhere near as complex as rocket science but it’s not something you can do without a degree in accounting or finance, a computer, and a spreadsheet program. I would recommend hiring an hourly fee investment advisor to get your started. They can get you on track with a plan that will work for you.
So, as you can see, investing can get quite complex and you really need to have some knowledge behind you to do it successfully. I hope that by sharing my mistakes I have prevented you from making them yourself.
So readers, have you made any investment mistakes? What did you learn?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.