If you are just getting started investing, or are still a beginner, you are going to make some mistakes. It is an inevitable fact when starting anything new that some blunders will be had.
This can scare a lot of people away—and even cause some to quit—before they can realize the gains to be had from investing. By reading the following common mistakes, you will have a good idea of what NOT to do, as well as what you should do instead.
1. Not Starting Early Enough
There is an old Chinese proverb that says, “The best time to plant a tree was 20 years ago, but the second best time is now.”
The same can be said for investing. It takes time to build wealth through investing, so start as soon as you can. Many investors can attest to wishing that they had started a long time ago and will tell you themselves that you should not wait any longer to dive in.
The best thing you can do is to get started today! Your money will not have a chance to grow if you are sitting on the sidelines. Do some research on an investment that you would like to make, and if it is sound, then pull the trigger!
Mindset is a key component to becoming a successful investor. You have to develop discipline to know what is a good investment and what isn’t.
You need to realize that not every investment you make is going to work out. That doesn’t mean that you shouldn’t get back on the horse and make new investments though. Having a strong mindset can help you separate yourself as a lifelong investor.
Another component of mindset is knowing that investing is a marathon, not a sprint. This is not a get-rich-quick program. A get rich very, very slowly mentality will take you much further.
Lastly, you need to leave emotions out of investing. I know this is very difficult for most of us. This is your hard-earned money we are talking about. But when you allow emotions to get involved, it is very easy to deviate from the plan that you have set up for yourself.
This goes hand in hand with mistake No. 1. Put together a plan—one that takes as much emotion out of the process as possible. And stick to it.
It is completely understandable for new investors to be afraid to get in the game. Fear of losing your investment, fear of looking foolish by buying a bad investment, or fear of “timing” the market wrong can all be deterrents.
What we need to do is replace our fear of buying the wrong asset to a fear of waiting too long to invest. It’s much more detrimental if our money doesn’t have time to properly grow and mature. Time is your biggest ally when investing.
If you have set up a solid investing plan and are able to stick to it, you should be well on your way to keeping the emotion of fear out of the equation.
4. Thinking You Can Go It Alone
There are so many places nowadays that you can go for knowledge. And BiggerPockets is one of the best resources out there to reach out to a community of investors.
You should not be embarking on your journey alone.
This is especially true when it comes to real estate. Having someone who has been there and done it before can be one of the most important tools in your investing tool belt. A seasoned investor can offer so much—from preventing the purchase of a bad property to helping you save money with rehabs to hooking you up with professionals who won’t take advantage of you.
Get on the forums here on BiggerPockets. Search for questions others have asked and read the responses from investors. Post your own questions, and get into meaningful conversations with those who have been there before you.
Another great approach is to join some local groups. For real estate, look for a Real Estate Investor’s Association (REIA). There are many other investor clubs, as well, that just talk about investing in general.
These are great ways to meet like-minded individuals and learn from others’ successes and failures.
5. Lack of Patience
If you haven’t been paying attention, I’ll state it again. Investing is a long game. It takes time to build wealth through investing.
It is extremely rare for someone to create an abundance of capital when just starting out. If you think you are going to get rich and retire within a few years by investing, you have come to the wrong place.
Don’t get me wrong. If you had put your life savings into Amazon when they first went public, you could be doing very well today. It still would have taken 20-plus years for your money to really grow though, and you would have had to sit through a few large pullbacks—something that someone without patience probably wouldn’t have the ability to do.
Get invested as soon as you can, and stick with it over the long haul. If you buy solid assets that you have done your research on, you should have no problem waiting for them to grow.
6. Not Sticking to Your Strategy
When you first start out investing, you may get the itch to buy anything that looks good to you at the moment. This is an easy way to get yourself into trouble and involved in some bad investments.
A key to investing successfully for the long haul is setting up some sort of investing plan and then making sure that you stick to that plan. This could be only buying stocks that are at a certain P/E or only buying real estate in certain neighborhoods at a certain equity level.
There are many different strategies out there for attaining success as an investor, but none of them matter at all if you can’t stick to them and be disciplined.
Don’t worry. It comes with practice and experience.
Here is another opportunity for you to be diving into investing forums and listening to what others are doing that is making them successful.
And here’s a helpful forewarning: If someone is telling you to pay for their plan that will get you 10,000 percent increases on your money… RUN!!!
Start small, learn some basic strategies for choosing which assets to invest in, and grow your knowledge from there.
7. Not Accounting for All Costs
When you invest in real estate, there are a lot of costs that can go unaccounted for if you aren’t paying attention. These are things like closing fees, holding costs when rehabbing, and even utilities when trying to sell a property. You can find yourself in the negative on an investment if you aren’t paying attention to these costs.
When buying and selling stocks and in all other asset classes, there are also costs that you may not be considering. Trading fees can hurt your bottom line if you don’t account for them, and taxes when making capital gains will quickly eat into any profits you think you had at the end of the year.
Hopefully you have picked some assets that make you some solid gains, and sometime down the road you are able to sell them for a profit. It is at this point that you need to really think about the costs associated with that sale.
Don’t go buy a brand new yacht with all of the proceeds, because Uncle Sam will come knocking on your door—and will most likely want to take that new yacht for a spin!
8. Keeping All the Profits
So, you did well on your first investment. You should go out and buy a shiny, new car. Not!
A savvy investor knows that the way to build wealth is to roll those profits into new investments and exponentially increase your net worth. You can even get tax breaks by turning profits from one investment into another investment’s purchase.
After you have accounted for the costs associated with making those profits, you should be looking into what you can roll it into. Growth on growth is the way to build real, long-lasting financial freedom.
That isn’t to say that you shouldn’t keep some of your earnings for yourself. Hey, you deserve it, too.
9. Not Continuing Your Education
Remember when I said that investing is a lifelong process? Well, if you want to stay in it for the long haul, you will have to keep studying, learning, and adapting.
The landscape of global markets is constantly in flux, and you must stay up to date on what is happening in order to be successful.
Technology is constantly changing, and new companies emerge that take advantage of the new tech.
If you are not paying attention to what is changing and happening, then you will miss opportunities for investing in places that have real potential for big growth.
This doesn’t mean that you need to spend hours each day studying what is going on in the Mongolian wheat sector, it just means that you should realize you never know everything and should treat learning as such.
10. Not Having Multiple Exits
This goes back to your strategy, but when you purchase something you should always have an exit plan in place. Sure, we want every investment we make to skyrocket to 1,000 percent gains, but that just isn’t the case.
What happens when a stock you purchase drops 5 percent? Does your strategy entail selling immediately? What happens if it were to drop 10 percent after that?
For some people, they sell as soon as their stock loses 3 percent; others won’t sell regardless of what happens in the short-term. It is all up to you as an investor and the plan that you have put in place.
This is even more true when investing in real estate. If you buy a fix and flip house and then the market shifts downward, do you sell for a loss or rent it out and gain some losses back?
This is what it means to have multiple exits. Plan for the unexpected, and it won’t be such a shock.
11. Miscalculating Estimates
This is more tailored toward real estate investors, but making estimates is a huge part of investing in general. For real estate, you are estimating what the value of the home is now, in its current state, and in the future, when it’s all fixed up and has appreciated. You are estimating how much it will cost to repair and how long that will take.
When you invest in a company through stocks or otherwise, you are making estimates about how you think that company is valued now and how you think they will perform and subsequently be valued in the future.
Remember you can always look back at the history of a town, neighborhood, or company. That being said, past performance is not indicative of future results.
12. Thinking Too Small
This is not saying that new investors should dive right into the deep end and throw all of their savings into the newest and hottest company, hoping for millions.
Here we are talking about not having a three, five, 10, and 30-year investing plan. This plan will always be changing, but looking into the future, you should have your eye on taking down bigger investments and larger projects.
Put a plan in place for what you are going to do with the proceeds from any gains that you make. If you can roll some small gains into something that has a lot more upside, then now you are thinking big.
13. Not Doing Due Diligence
So, you heard a guy on the radio tell you about the hottest new stock he found. Or you were eavesdropping on a conversation in the coffee shop about this new neighborhood that all the investors are flocking to.
Before you go out and buy that stock, or purchase a home in that neighborhood you heard about, stop! Stop and do some real research of your own.
And don’t try to find all of the reasons why those people were right; try and prove them wrong. In the process of trying to prove them wrong, you might come to find out that they were absolutely right and want to move ahead with an investment. But I would guess that more times than not, they aren’t going to be great investments.
Pundits can be heard every day giving you advice on how to invest your money and what the newest, best thing is. It is up to you to do the research and find out if an investment fits into your investing plan/strategy.
Related: The Ultimate Guide to Due Diligence
14. Over- or Under-Rehabbing
Rehabbing is pretty specific to real estate investors. New investors might look at an episode on HGTV and think that every house needs to have the most expensive granite counters and flawless tiled showers, but that just isn’t the case.
You need to know your market and do what is necessary to rehab your house to the status of the neighborhood or city that it is located.
You wouldn’t put laminate counters into a house in the most expensive part of Beverly Hills, nor would you put granite counters and hardwood floors into a house in a rundown part of town that everyone is trying to get out of.
This harks back to mistake No. 13. If you haven’t done the research on the neighborhood that you have invested in, you could make some costly rehab mistakes that will affect your bottom line or how quickly you can get a property moved into or sold.
As a new investor, there are many things to be aware of. These are just some of the top mistakes that a new investor might make when getting started.
There are many resources out there that can help you along your way and ease your fear about getting started. For those interested in getting into real estate, this is an excellent resource for beginners that might help you get started on your journey.
Start small, but plan to build up your investing into something huge!
Anything you’d add to this list? Questions or comments about the above?
Let’s talk below!