Learning to invest is not easy, if anyone tells you it is then they’re lying. Some may say that fitting savings into your budget is a lot easier than learning how to manage money and they would be right. Spending less to save more is easy, learning to invest wisely and growing your money over time is a whole other topic.
Finding an investment strategy that works for you doesn’t happen overnight plus there are investment hazards that you’ll need to avoid. It takes time to learn how the stock market works and what makes the value of your money fluctuate. Putting cash aside every month is a good start to building your wealth, but if you don’t want your $5,000 to still be worth $5,000 in five years then you need to manage money wisely.
The world of investing can be overwhelming, with a variety of investment options to choose from such as stocks, bonds, mutual funds and ETFs as well as several different account options such as IRAs and non registered accounts. A good investment strategy takes time and that comes with experience.
Here are four beginner mistakes to avoid when it comes to how to manage money wisely:
Don’t jump in without dipping your toes
Just as you would ease into a cold lake, you want to take it slowly when learning to invest. Don’t open an online trading account and start buying stocks your first day in. A better investment strategy would be to open an account with your bank and start by taking advice from a professional. I’m not only saying that because I make my living by giving investment advice, I’m saying it because it’s true. How can you truly be good at something if you don’t fully understand it? The answer is you can’t.
Start by investing in already diversified, low risk investments such as bond mutual funds. As you become comfortable with the market and as you accumulate more money you can start to add in new investments.
Don’t take advise from your co-worker’s husband’s neighbor
It’s called personal finance for a reason. What works best for you is probably not the best investment for someone else because everyone has different goals, time horizons and levels with risk. If you want to take advice about which investments to buy seek the advice of a professional.
CNBC refers to this as chasing the herd and says it’s a big first time investor mistake. ”Everyone knows the phrase, “buy low, sell high.” But frequently, the opposite holds true, as popular investments get widespread media coverage, and investors wind up buying in at a very high price after the run is mostly past.”
Don’t hand over money without reading before you sign
When it comes to your hard earned money always read the fine print on everything from the fund fact sheet or prospectus to the account opening document. Make sure you understand what type of account you’re opening, the transaction fees for deposit and withdrawal fees as well as any restrictions and time delays to gain access to your money.
Investing in the market is very different than keeping your cash in a savings account. It’s very easy to get access to your cash by transferring money from your checking to your savings account, but selling investments can have a delay of up to three business days before you can access the money. It’s important to understand these delays prior to investing…just in case you need the money for an emergency.
Don’t invest all your money based on a tip
There is no such thing as good investment advice except to build a well balanced portfolio, I’m a CFP so I can say that with confidence. Buying only stock in one company is a bad idea because it’s the investment equivalent of placing all your money on Red 9 and hoping it comes up. That is if a roulette table had tens of thousands of number and color combinations instead of just 36. There are tens of thousands of investment options and putting all of your money into just one seems like a bad idea.
Just as location, location, location is the rule of a good real estate investment diversification, diversification, diversification is the golden rule of a good investment portfolio strategy. This includes a mix of cash and fixed income as well as foreign and domestic equities. The amount of money in each asset class depends on your individual level of risk.
I’m a balanced investor which means I hold 60% equity (only domestic, no foreign) and 40% income (both domestic and foreign) in my retirement portfolio. That’s a level of risk versus return that allows me to sleep well at night and not worry about daily market fluctuations. If one asset class loses the other will most likely gain and overall I should expect to see steady growth (despite short term changes) over the long term because the majority of my account is invested in equities.