New investors often face a ton of challenges during the first couple of months or even years after starting the business. “More than necessary information” often hinders the newbies from preparing an effective financial plan. Some people quit too soon after starting the investment, mostly because they do not clearly understand the financial factors.
The following are a few challenges that first-time investors struggle with and how you can overcome them.
1. Limited Capital
Limited Capital: New investors often have limited funds to invest. This means they must focus on low-cost investments that offer the potential to generate returns. Now, this not only limits investment options but also increases your risk. Stats tell us that new investors with $5,000 or less to invest lose an average of $2,700 in their first year. First and foremost, new investors must make a budget and find ways to increase their capital. Like… saving money, getting a side job, and/or investing in high-yield savings accounts. No less important is having a plan for how to allocate the capital. Research from the University of British Columbia states that investors who plan their investments can expect returns up to 2.5% higher than those who don’t.
2. Over Information
The problem of plenty can sometimes get really harsh. With so much information available online, new investors can easily get overwhelmed. Inexperience makes it hard to tell which information is correct and trustworthy. For instance, free and low-cost financial advice from social media is usually biased. New investors should be aware of their resources and look for reliable and experienced advisors. Trustable sources like SEC, FINRA, and Edelweiss can be a great start. But still, new investors should never take any advice without understanding it first. Yes, without understanding; it means researching, reading, and fully comprehending the advice. Many people who want to participate in the stock market search through Google to learn the basics, and soon find themselves overwhelmed by seemingly complex and even contradictory suggestions on the Internet.
3. Short-Term Investing Mindset
New investors often think short-term and become short-term traders. They try to time the market and make quick profits. But this approach carries high risks. New investors should focus on long-term goals and diversify their investments. The key is to find a balance between short-term and long-term investments. Due to spreads or commissions, short-term trading can be expensive. The average return of a long-term investor is typically higher than that of a short-term day trader. If you still want to give it a try, start with a small amount and practice with a demo account.
4. Unrealistic Expectations
“Get rich quick”, “get rich in 11 days”, and “Money doubles in one month” sound tempting, but these are unrealistic expectations. Yes, it’s possible to make a lot of money in a short time. But it’s also possible to lose it all. It’s that simple! In fact, the average annual return of the stock market is around 10%. New investors must understand that there are no shortcuts to success. Investing is a long-term process that requires patience and discipline.
5. Risk Management
New investors let alone “managing” their risk, they don’t even know what risk is. That’s why they take high risks and end up losing money. It’s important to understand your risk tolerance and how to manage it. Research shows that investors who do well in the stock market have a plan for how to limit their losses. That’s why it’s important to have an emergency fund and invest in safe investments like bonds and mutual funds.
6. Ignoring Taxes
Tax is an important factor to consider when investing. New investors usually don’t keep track of the taxes they owe. But taxes can significantly reduce the returns of your investments. That’s why it’s important to find out what kind of tax deductions and credits you can take advantage of. It’s also important to understand which types of investments are taxed more than others and how to use tax-loss harvesting to your advantage.
7. Failure to Diversify
New investors, like really new ones, fail to diversify their investments. They put all their eggs in one basket and become exposed to too much risk. Diversification we all know is key to reducing risk and protecting your investments.
Mostly, the flow of information is comforting and helps us feel more confident in our decision. The trick is to find the right balance when taking information and turning it into action. In fact, most investors can pass some very traditional suggestions-measure twice, cut once, and survive the modern information tide. New investors must be aware of the challenges they face. It’s important to understand the risks and how to manage them. It’s also important to do your research and be patient. With the right plan and strategy, new investors can achieve their goals and make money in the stock market, or at least not lose it.