When you first begin investing, there is a very good chance that you will be stepping into a financial and emotional rollercoaster. Given your lack of experience, the forthcoming market spikes and drops, which are unavoidable, will probably result in a substantial amount of stress and anxiety. This is completely normal, and the vast majority of new investors go through the same struggle. Especially as an entrepreneur with little extra time, you may need some investment advice.
One way to overcome the drawbacks of not having a ton of experience is to learn the most prevalent blunders that beginner investors make. The following few examples, will be a great starting point for those who want to avoid “rookie” losses and reach profitability a bit faster.
Postponing the Entrance into the Investment World
According to Tom Terzis, a Wealth Specialist based in Toronto, the worst thing that you could do is postpone your entrance to the industry. The entire investment industry is built on the concept known as the “time value of money,” and the factor that you can never recuperate is the time that you wasted. To understand this investment advice a bit better, consider a situation where someone has $5,000 that they want to invest in a mutual fund that grows at an average rate of 10% per year.
If they do so immediately and leave it aside for 10 years, they will accumulate a total of $12,968.71. If they are unsure about the market and decide to wait five years before investing, which means that they only invest the money for half of the term, they will have $8,052.55 a decade from now. Waiting for those additional five years would cost them $4,916.16 because they missed valuable years of growth. In other words, they would lose out on nearly the same amount of money that they originally invested because they waited. Hence why starting as soon as possible, which is right now, is crucial.
Not Diversifying the Portfolio
The reason why the previous example touches on mutual funds is that those investment vehicles carry some of the best diversifications in the market. In translation, they are comprised of a wide variety of securities that come from many different industries. So, if the value of the technology-based corporation plummets, the mutual fund would only take a minor hit since other sectors offset the loss.
A lot of beginners fail to realize this when they start as they are unfamiliar with the idea of diversification. Instead, they focus on purchasing individual securities from companies that they might be familiar with. The problem that often arises, however, is that subsequent drops in value for those companies cost them a lot more than they should.
Buying Based on Popularity Instead of Familiarity
Another common mistake that many people perpetuate in the early stages of investing is buying based on the popularity of the securities. Even though investing in mainstream assets is a bit easier from the standpoint of information accessibility, public awareness does not translate to profitability.
For example, it is hard to find an investor that does not know about companies like Facebook, Amazon, Google, and Apple. Very few of them, however, know the inner-workings of these tech giants enough to justifiably become their shareholders. That means that, according to Tom Terzis, your portfolio should reflect securities coming from organizations that you thoroughly understand and keep up with.
Skipping the Research
After finding an investment opportunity that you are familiar with, you cannot allow yourself to skip the research process.
Regardless of how closely related or knowledgeable you are about the venture, not doing your due diligence on the investment advice you have access to is the shortest route to losing money. Some questions that you must consider are:
- What have been the returns on the asset in the past few years?
- How is the industry in question doing presently? Are there trends that pose a threat to the lucrativeness of the venture?
- What is the company doing to increase its value?
Keep in mind that these are just thought-building questions that are meant to lead you into additional inquiries. For instance, analyzing the industry of the company that you plan to invest in will help you learn about the competition, threat of obsolescence, local economy, and more.
Letting Others Influence Your Decisions
When you first get into investing, it is not uncommon to see your opinion and strategies change extremely fast. This arises as a byproduct of your inexperience mixed with the strong external influence of investment advisors, financial brokerages, and many other entities that want to earn your money by giving you “sound” investment advice. If you have the capital to pay an advisor, you should certainly consider that option. If not, however, you need to focus on educating yourself as much as you can.
While doing so, it is imperative that you keep all outside influences at bay. That includes everyone from your coworkers to family members who believe that they are incredible investors. In simple terms, unless the advice is coming from seasoned and successful financial experts, there is no reason for you to let it take precedence over your strategy.
It Will Not Be an Overnight Enrichment
Except for Warren Buffet and a few other tycoons, earning millions or billions of dollars through passive income in a short period of time is practically impossible, especially in the current market. Instead, you need to accept that growing your capital will take some time. Consider the example from earlier where $5,000 invested for 10 years at 10% interest resulted in a gain of almost $8,000.
That means that your average annual return is a mere $800. If you let the same capital sit for another 10 years, however, your gain shoots up to more than $28,000. Hence why waiting is something that you should get very comfortable with. Patience is the best investment advice.