Investing is scary. It’s not just the risk of losing all your money, but it’s also the fear of being so overwhelmed with information that you don’t know what to do. You are just as likely to make a poor decision by following good advice as you are by being random about it. And that uncertainty can really take a toll on your peace of mind, especially when you have dreams of retirement in sight.
But fear not! This post will give you three very practical pieces of advice for avoiding common mistakes and making sure your investments serve their ultimate purpose: growing to help provide for your future needs.
How dangerous can investing mistakes be?
Let’s start with a story that will scare the pants off you. Research has shown that those who lost 50% or more in the stock market during the financial crisis of 2008-2009 were more likely to suffer from depression than those who had faced unemployment.
Now, obviously people losing their jobs often have other issues as well, such as health problems, divorce and so on — but we recognize that we still live in a culture where saving for retirement and investing is very much tied up with our identities. So take this research as a warning: mistakes matter.
If you’re feeling overwhelmed right now, don’t panic. Take several deep breaths. I’ll wait…
Now that you are calm enough to think, let’s get you pointed in the right direction. Here are five pieces of advice that to help avoid the worst mistakes.
1) Start with index funds or ETFs
Investing should be boring. If you are constantly checking your stocks for possible gains, trying to time the market or fretting over market crashes you aren’t investing — you are gambling.
There is nothing wrong with using index funds and ETFs — these are indexed portfolios that match a specific benchmark and typically track the returns of one or more of the major indices. They can be perfect for your long-term investments because they won’t fluctuate as much as individual stocks, and they can provide quick diversification without giving you any decision making.
But those aren’t the only options. If you know what you’re doing (that wouldn’t be easy) then try to find a fund that matches your style preferences (for example: aggressive growth, value, etc.). If you don’t know what you are doing, stick to something systematic.
Either way, you want to become so familiar with your investments that you don’t have to check them very often. Stick to a strict schedule of saving and quarterly investment, and pay yourself first. And don’t worry so much about the market — just enjoy seeing the value go up over time!
2) Do NOT try to get rich quick
One of the biggest mistakes that I have made is trying too hard to beat the market. It just doesn’t work, especially when clinging to one stock or industry for too long. Even the best investors always end up getting out at the wrong time.
Instead, I’ve started to shift my focus towards slow and steady growth. Don’t get me wrong — this doesn’t mean you should sit on your hands and do nothing. It just means that you will need to shift your expectations and change your attitude about what “success” looks like.
For example, I used to think about saving up a lump sum and then taking a small portion of it (5%-10%) and investing it aggressively. I would dream about becoming rich based on an early investment in some tech company that would go public or get bought right away for billions of dollars.
But that’s not how it works. Especially as a first time investor, you need to start out by saving as much as possible (even if it means living with less for a while), and then put those savings to work over the long run. Don’t try to make any super spectacular decisions early on — focus on consistency and just investing what you can each month.
3) Start young and invest for the long term
The best way to avoid making bad investing mistakes is to start early — this advice isn’t just common sense, it’s backed up by research.
This is also the only time in your life when you won’t have any other major financial priorities (such as children). Your biggest priority should be to start saving and investing in order to make an impact on your future.
And when I say start early, I mean it. While you will probably be fine if you start in your 30’s, the younger you are when you get started the better. This is because your investments have more time to grow, there are less risks of market volatility and compound interest will work that much harder for you.
For example, imagine that two investors both throw $5,000 into an investment fund at age 25 among other things. The one who started at age 35 would have $11,304 by age 65. The one who started at 25 would only have $6,000.
Now imagine that the same two investors start investing together at age 20 and stick with it for life — let’s call the one who starts later “Jim” and the other one “Josh”. So Jim starts in his 20’s while Josh was already 23.
By the time Jim is 65 he has $500,000 to show for it. And Josh? Well, despite starting later, Josh actually has $1,250,000 to show for it. He ended up earning $750k more than his friend who tried to get a head start on him by investing from age 23.
In other words, you have a lot to gain by investing early and then just sticking with it over the long term.
4) Never forget about your employer match
Your employer doesn’t have to contribute to your retirement savings. In fact, employers don’t have to contribute anything at all! In most cases, the company will only offer a 401(k) plan because it is a tax-efficient way for them to save money on the back end.
The good news is that if you have a company match then you should definitely grab that money with both hands. The only caveat here is that if you are using an aggressive strategy it might be better to wait until you are more established later in life. That way you have more time to ride out any market fluctuations.
The main reason for this is that you are taking the risk of losing the money if your investment doesn’t work out. And if you are using a strategy like investing in risky tech stocks there is no guarantee that it will earn back your original contributions.
So while this advice might be common sense, it’s worth repeating. Since this is money that isn’t tied up in an IRA or other tax-advantaged account (a 401(k) is pre-tax, but then taxed when withdrawn) make sure you don’t take on anymore risk than you want to right now.
5) Don’t try to always be a master investor
The last thing I want to say is that you should never feel bad about not knowing how to pick stocks, what will happen with Bitcoin, or what the best index fund is.
Despite the fact that we are constantly reading about those topics, there is no substitute for experience and knowledge. And the only way to gain that is if you become a smart investor, and succeed. The best way to do this is to invest in things that you understand — no tech stuff, no tech stocks — and use strategies that you understand.
The people who would be happy to hear this advice are those who have tried and failed at investing and then blame themselves for it. Instead of feeling like a failure they should feel good about the fact that they knew so little. They will probably use this as motivation to learn more and build their investment skills over time. And on a related note, it doesn’t mean that you should quit investing entirely. Instead, it means that you should focus on being a long-term investor first. This will allow you to grow your wealth over the long term and help you weather any bad luck in the meantime.
So if I can leave you with one piece of advice today, let it be this: relax! With these five tips in mind, your investment strategy can go in any number of directions. Just don’t forget that the money is supposed to work for you rather than the other way around.
