Top 5 Investing Mistakes New Investors Make

Investing can be a powerful way to build your wealth over time. However, many young investors make common mistakes that can make their investments overly risky or disorganized.  Understanding these pitfalls can help you invest your money more efficiently so that you can build your portfolio over a long period of time. In this guide, we will explore the top five investing mistakes young investors often make and how to avoid them.

Mistake 1: Not Having a Clear Investment Plan

One of the biggest mistakes young investors make is diving into the market without a clear plan. Without a strategy, it’s easy to get lost in the noise of market fluctuations. For me, when I began investing, I didn’t have a coherent plan at all. This caused me to lose over half of the initial money I invested within the first couple of months. At the time, I was obsessed with electrical vehicle companies. Sp, I delegated over half of my investment portfolio just to these companies, and when some of them crashed, I lost a lot of money. So please prioritize outlining a plan before you begin investing. But also make sure that your plan is adaptable so that if there is a change in the market, you can adjust accordingly.

Why a Plan is Essential

A well-defined investment plan helps you set goals, understand your risk tolerance, and choose the right investment vehicles. It acts as a roadmap, guiding your decisions and keeping you focused.

How to Create an Investment Plan

1. Set Clear Goals: Determine what you want to achieve. Are you saving for a car, college, or just wanting to build wealth for the future? 

2. Assess Your Risk Tolerance: Understand how much risk you are willing to take. This will influence your investment choices.

3. Choose Investment Vehicles: Decide whether you want to invest in stocks, bonds, mutual funds, or real estate. I recommend at least investing in index funds and individual stocks so that you have a balance of both high-yielding and safer investments to maintain the substance in your portfolio. If you have questions about diversification or different types of investments, please go to my other guide (“Investing Basics For Teenagers”).

4. Review and Adjust: Regularly review your plan and make adjustments as needed. Again, the market isn’t constant; it’s fluid. So, you must be ready to adjust your initial plan depending on companies’ financial statement reports and the state of the market at the time. 

By having a clear investment plan, you can make informed decisions that align with your financial goals.

Mistake 2: Chasing Trends

Another common mistake is chasing trends or following the latest investment fads. While it can be tempting to jump on the bandwagon, this approach often leads to poor investment choices. I often see a lot of new teenage investors that attempt to day-trade and invest that way. While it may seem like fun and an effective way to invest, it’s more similar to gambling than actually making smart, sound investments. So, in order to mature the right investing behaviors from a young age, you must invest in companies that you truly believe in. Therefore, I don’t recommend selling a stock within just two weeks of purchasing it. Instead, please do extensive research with articles, financial statements, and news in order to make smart investments in stable, high-yielding companies in order to prevent quick investor’s remorse.  

The Dangers of Trend-Chasing

Investing based on trends can result in buying high and selling low. Many young investors get caught up in the excitement of a hot stock or cryptocurrency, only to see their investments plummet. This makes diversifying your portfolio and purchasing shares of companies and index funds that you have done extensive research into. By doing this research, you will find that the best companies are the ones that are stable investments for several months or even years. 

A Better Approach

Instead of chasing trends, focus on long-term investments. Research companies and industries that have solid fundamentals. Look for investments that align with your goals and risk tolerance. If your goal is to save up for college, I strongly recommend being slightly on the safer side with your investments, as college tuition can be steep nowadays. And in order to be safer with your investments, you must diversify in different sectors and make different types of investments (individual stocks, index funds, bonds etc.)

Mistake 3: Ignoring Diversification

Many young investors make the mistake of putting all their money into one or two investments. This lack of diversification can increase risk and lead to significant losses. Spreading your investments into several sectors of the market such as tech, gas, infrastructure, and more can mitigate the potential losses you can have while the market is on a downwards trend. For instance, when I was younger, I made poor investments into electrical vehicles, so when the electrical vehicle market began to drop, I lost around half of the money I initially put in. I saw all of this to underscore that you must make calculated investments into several different sectors and investment types in order to maintain a steady portfolio for years.  

Why Diversification Matters

Diversification spreads your investments across different asset classes, reducing the impact of a poor-performing investment. It helps balance your portfolio and can lead to more stable returns over time. Many young investors make the mistake of getting fixated on one specific market Thus, it’s important to prevent tunnel vision and be open to investing in different sectors. 

How to Diversify Your Portfolio

1. Invest in Different Asset Classes: Consider stocks, bonds, index funds, and commodities.

2. Choose Various Sectors: Invest in different sectors of the economy, such as technology, healthcare, and consumer goods.

3. Consider International Investments: Look beyond your home country for investment opportunities. I would recommend international investments once you are comfortable and have experience buying stocks and bonds.

By diversifying your portfolio, you can mitigate risk and improve your chances of achieving your financial goals.

Mistake 4: Timing the Market

Many young investors believe they can time the market, buying low and selling high. However, this strategy is often more challenging than it seems. Even the world’s most premiere inventors can’t predict the market perfectly, so don’t think you can either. Instead, focus on diversification and making investments for your long term finances.

The Reality of Market Timing

Market timing requires predicting short-term price movements, which is nearly impossible. Many investors end up missing out on significant gains by trying to time their trades. Market timing is very similar to gambling in both its risk and practical ability to do it “well.” Again, nobody on this planet is a genie in a magic lamp, so please refrain from trying to time the market.

A Smarter Strategy

Instead of trying to time the market, consider dollar-cost averaging. This strategy involves investing a fixed amount regularly, regardless of market conditions. It helps reduce the impact of volatility and can lead to better long-term results. I recommend this strategy even when the market is appearing to go down. Because while investing during a recession may seem illogical, these are the times to buy stocks and bonds at (as I like to call them) discounted prices due to the overall decline in the market. For example, for those who were investing during Covid, they initially saw significant losses, but as Covid began to decline, their investments began to climb and reach new heights that the market had never seen before. So instead of looking at red days as a loss, look at them as an opportunity to invest at a discounted rate. 

Mistake 5: Overreacting to Market News

Young investors often react emotionally to market news, leading to impulsive decisions. This behavior can be detrimental to your investment strategy. Many of my peers and even adults that I’ve been around have shown some distress during times when the market is declining. So whenever you feel this way, remember that there is almost always a rebound. And it’s even smart to invest during times when the market is going down rather than selling. Think of it as the buy low, sell high mentality.

The Impact of Emotional Investing

Emotional investing can cause you to buy high during market euphoria or sell low during panic. This reactionary behavior can derail your investment plan and lead to losses. I know for new investors specifically it can be difficult, but it’s important to stay level-headed while the market is growing exponentially or declining fast. Because in the end, as long as you diversify, research thoroughly, and stay true to the investments that you’ve put effort into, your investments will rebound overall and grow as the years go by. 

Staying Calm in Volatile Markets

1. Stick to Your Plan: Remind yourself of your long-term goals and investment strategy.

2. Limit News Consumption: Avoid constant monitoring of market news, which can trigger emotional responses. I know this can be difficult with TikTok and Instagram rampaging the minds of many teenagers, but staying off of the internet can be one of the most effective ways to reduce your concerns.

3. Seek Professional Advice: If you’re unsure, consider consulting a financial advisor for guidance.

By staying calm and focused, you can make more rational investment decisions. So, always stick true to the research and work you put into diversifying your investments, and remember that investing will come with turbulence and success.  

Conclusion

Investing can be a rewarding journey, but it’s essential to avoid common mistakes. By having a clear investment plan, avoiding trend-chasing, diversifying your portfolio, resisting the urge to time the market, and managing your emotions, you can set yourself up for success. I realize that these pitfalls can be hard to avoid in a world where day-trading, emotional effects, and being fixated on one aspect of the market can all be difficult to avoid  

So, remember, investing is a long-term game. Stay informed, be patient, and keep your goals in mind. During your investing career there will be several struggles and triumphs, but remember investing is nuanced just like everything else in life. So, with the right approach and staying patient, you can have a long and successful investment journey.