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Don’t make these mistakes that first-time investors are prone to

Getting started investing can be daunting. It’s so easy to make missteps when first building your portfolio and strategy if you don’t have the experience that comes from years of doing this.

However, being aware of the most common beginner mistakes can help you avoid them and give you the best chance of success.

Here are some of the biggest mistakes first-time investors should seek to avoid.

Investing money they can’t afford to lose

The money you invest should never be funds you’re relying on for your immediate living expenses, emergencies, or major planned purchases in the next three to five years.

The rising cost of living has been brutal over the last year, and everyone’s going to have some worries about whether supermarket prices or energy bills are going to have another massive hike.

Investing always carries risks, so only use money you are comfortable losing some or all of.

Don’t gamble away rent money or emergency savings. Know your risks.

Letting emotions drive decisions

Fear and greed often lead new investors to make impulsive, irrational choices.

Selling all your holdings during market dips is giving in to fear. Pouring money into “hot” assets on a surge is giving in to greed.

Make level-headed decisions aligned with long-term financial goals rather than emotions.

Getting caught up in market timing

Don’t waste energy trying to predict market tops and bottoms. No one can time the market consistently. Build a balanced, diversified portfolio that matches your risk tolerance and time horizon, then hold with discipline. Time in the market beats timing the market.

Not diversifying investments

Failing to diversify your portfolio across different asset classes, market sectors, and geographic regions leaves you highly vulnerable to risk.

When one area slumps, others can balance it out.

For example, the property market in the UK has been an absolute rollercoaster and you wouldn’t want to be relying entirely on being able to sell that house you bought a few years ago.

Diversification smooths volatility over long periods. Divide your investments.

Overtrading and chasing hot trends

Trading too actively leads to excess fees dragging down returns.

First-time investors often chase assets after huge price surges only to buy high and suffer losses in eventual declines.

Stick to long-term positions in quality investments rather than speculation.

Not paying investment fees and taxes

New investors often overlook the portfolio drag caused by investment fees and taxes on gains and income.

These costs substantially reduce net returns over decades. Prioritise tax-advantaged accounts and low-fee index funds while starting out. Mind expenses.

Taking unnecessary risks

Some novices put money into overly risky assets they don’t understand well enough, drawn in by the hype.

Cryptocurrencies, penny stocks, forex and speculative options are examples. The higher the potential returns, the higher the risks generally. Invest wisely.

Trying to beat the overall markets

Very few investors consistently outperform the overall stock and bond markets after costs.

Aim to earn average market returns rather than betting on picking winners that beat them.

Successful long-term investors earn “average” returns compounded over decades.

Not having an investing plan

Failing to create and follow a written investing plan with defined financial goals, asset allocation targets, time horizons and risk management rules is a huge mistake.

Emotions kick in without a roadmap. Craft a plan and stick to it.

Trying to time major market events

Don’t make changes based on predictions around events like elections, Federal Reserve moves, or major legislation.

No one can reliably predict outcomes. Stay committed to long-term plans rather than gambling on market timing tied to events.

Not monitoring or rebalancing

Revisit your portfolio at least quarterly to assess if holdings are aligned with original allocation targets.

Rebalance periodically back to desired allocations when drift occurs through natural market movements. Pay attention.

Not doing their research when investing in something new

Understand what you’re investing in. When exploring new assets like cryptocurrencies, research the underlying technology, team, use case, risks, and landscape before buying.

Never invest in something you don’t understand. Knowledge is key.

For example, there are a lot of good reasons to invest in Bitcoin, but it would be a mistake to think that you can dive in without doing your research.

You can find the latest Bitcoin news at Bitcoinist. They offer crypto guidance beyond BTC news, with plenty of guides and resources.

Trying to get rich quickly

Accept that investing is a long-term, decades-long process to steadily build wealth.

Those seeking to earn massive returns quickly usually take outsized risks and lose money.

Be patient, avoid speculation, and let compounding work over many years.

The learning curve in investing is steep. Stick to proven principles like goal-focused diversification, balancing risk, rebalancing, minimizing costs, and tuning out hype.

Avoiding common novice pitfalls gives you a huge advantage.

Not having sufficient emergency savings

Before investing, build up emergency cash savings equal to three to six months of living expenses.

This cushions you from needing to sell investments at a loss if faced with surprise expenses like medical bills or job loss. Investing is for the long-term – have a cash safety net first.

Failing to update strategies and knowledge

Successful long-term investing requires continually expanding your knowledge as markets, regulations and products evolve.

Read news and analysis daily as an investor to update your understanding. Adapt your skills and portfolio as you gain experience.

Forgetting about inflation

Inflation steadily erodes the purchasing power of investment returns and savings over decades.

Things do seem to be finally turning around a little here in the UK, but you need to factor inflation into financial plans and aim to hold some assets like equities that historically outpace inflation.

Don’t let inflation catch you by surprise.

Not adjusting your asset allocation over time

As you move through different life stages, review your portfolio allocation to ensure it matches your changing timeline and risk appetite.

Your asset mix in your 20s may need rebalancing by retirement. Evolve your investments.

Trying to pick individual stocks

Most new investors lack the experience and resources to successfully select individual stocks that outperform over the long term.

Stick to broad, low-cost index funds to earn market-level returns first. Become an educated stock picker only later.

Hopefully, these additional mistakes to avoid provide greater clarity so your investing journey follows a wise path.

Take it slow, be thoughtful, do your homework, and don’t take unnecessary risks.

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