Investing Pitfalls Most Beginners Overlook
Investing as a beginner should never be compared to starting afresh in a new profession. Mistakes at the start might be allowed in other careers, but when it comes to investing, even a small blunder could be expensive, and possibly cost you all your savings. Therefore, in investing, avoiding mistakes is just as important as learning from them.
Not Anticipating Market Downturns
The financial crisis of 2008 exposed just how vulnerable average investors, and online trading, were to market downturns. When the market is burning hot, no one really thinks about recessions looming around the corner, but the unfortunate reality is that the market experiences downturns as naturally as it experienced upturns. Therefore, investors should have safeguards in their portfolio to mitigate the risk of a market downturn. Diversification is the most common procedure to optimize a portfolio against declining sectors. It’s highly advised to have a mix of investments in your portfolio. You may need to brand out to non-cash investment options to sail through turbulent times. That means carefully researching and weighing the risks against future economic issues.
Waiting for the “Best Time” to Invest
Even if you were to see highly lucrative investment options now, would you wait for just the right time when the returns are even higher? This is referred to as trying to “time the market,” where investors try to guess the best time to buy or sell. The problem with this approach is that investors are almost always wrong about the right time. The market is notoriously volatile and difficult to predict even with the most sophisticated algorithmic models. If you are trying to time the market, then you are only making guesses, much like a gambler. Instead of waiting for the right time to trade, look for investments that generate the least risk for a certain percentage in returns.
The toughest part of investing is managing risk and optimizing the rewards. Some investors are adept at taking on just the right amount of risk sufficient for the potential reward, however, there are also investors who avoid risk altogether. This can be just as bad as ignoring high levels of risk. When you try to avoid risk by playing it safe, you could miss out on great investment opportunities. You may as well just put your money in a savings account and generate returns below the inflation rate, plus, the markets are naturally too volatile to aim for the lowest level of risk. This is not too different from trying to time the market, which generates similarly disappointing results. Perhaps the worst mistake of all is expecting investing to be a bump-free ride. Beginners seem to believe that investing is not as energy-intensive as a conventional job. You may not have to work your limbs as much, but investors are expected to do their research thoroughly to avoid catastrophic results. The belief that investing is a “smooth ride” was never more evident than during the dot-com bubble in the nineties. Investors looked forward to quick returns and blindly trusted the tech industry. The result was a devastating crash that cost many their fortunes. As a budding investor, take note of these past blunders and avoid repeating them. Investing can generate passive income, but don’t take the “passive” part too literally. You should be willing to read the news, keep up with the industry trends, and understand how to perform a basic background check on a company to actually see returns on many types of investments.