When it comes to investing, one of the reasons that holds you back from getting started is the fear of making a mistake.
This is understandable, given your hard-earned money is on the line, but you can push through it. Just think of all the other hard things you’ve overcome in your life. I’m sure if you really think about it, you are just as capable (if not more) as everyone else who has made their first investment.
At the end of the day, I truly believe the biggest mistake you can make is not actually starting at all.
One way to combat this is by learning from other people’s mistakes so you can avoid making similar ones yourself. Ultimately, by understanding all the ways you can go wrong, you can build your confidence to take the first step.
In this article, I share five common investing mistakes that I’ve dealt with in the past and how you can avoid them.
Mistake #1: Investing without a plan
One of my best suggestions for new investors is to write down a plan of attack before going to the battlefront.
This gives you direction and keeps you focused in times of uncertainty. It’s also very easy to get distracted by every new shiny thing you come across in the first few years.
Oh, look! Lithium companies…
I’d also encourage you to write down the reasons you make a particular investment, which you can review over time as you learn more (and revisit during periods of market volatility).
Kate’s tip: Create a Google Doc to write down your investment decisions and outline your investment plan.
Mistake #2: Investing money that you can’t afford to lose
Are you planning to invest your emergency fund or house deposit?
If so, you’re playing with fire. Ouch!
Make sure you’re not using any money you might need in the next few years. Otherwise, you might be forced to sell your investments during a market decline because you need the money.
Mistake #3: Investing in companies or ETFs you don’t understand
Investing in anything involves risk, so try to avoid amplifying the risk by investing in companies or products you don’t understand.
If you’re planning to buy an Exchange Traded Fund (ETF), make sure you understand how ETFs work and what’s inside the fund before investing.
I unpacked a lot of those ideas recently on our ETF Investing mini-series on the Australian Finance Podcast. (Side note: think of ETFs like buying a pre-made salad rather than having to buy the individual ingredients at the store).
If you’re planning to invest in an individual company, there’s plenty of research you should be doing first. By doing this homework, you’ll be much more comfortable with your investment decisions.
Mistake #4: Investing all your money in one thing
This is a mistake that investors of any age make (just read some of Scott Pape’s newsletters) and is something that can wipe you out financially.
You might have heard the term ‘diversification’ already, but if not, it’s the process of spreading your money across different areas (e.g. not putting 100 per cent of your money in a tech stock ETF or in one single company).
Kate’s tip: Spend some time learning about different investment options and the ways you can diversify your investment portfolio. In a nutshell, don’t invest your life savings in the stock tip your uncle gave you.
Mistake #5: Investing without keeping records and doing the work
This is a mistake I made starting out. And one that I’d love to help others avoid.
Every time you buy and sell an investment or are paid a dividend, you need to keep a record of this. It will help you down the track, such as when you’re doing your tax return and calculating capital gains/losses on your investments.
Plus, you need to make sure you’re updating your details in the share registries (e.g. Computershare or Link Market Services) for each of your investments. Doing so means you’re actually getting paid your dividends and receiving all of the key documents. I promise this will save you a massive headache at the end of each financial year.
Kate’s tip: Set up a Google Sheet or a Sharesight account to track all of your investments in one spot.
Review and take action
Take a moment now and look back at my 5 common mistakes. Have you made any? I definitely have. And I’m doing better for it.
I hope learning about some common investing mistakes and how to overcome them will give you the boost you need to overcome the biggest investing mistake of all: never starting.
Take it from me. It’s worth it.