It seems everyone’s jumping into the investing game these days. In fact, the percentage of individual investors in the U.S. equity trading volume jumped up 4% in 2020.1 And events like the GameStop short squeeze in early 2021 have drawn even greater attention.
If you’re interested in investing, it’s important to know that everyone makes mistakes—but you can learn from the mistakes of others to help avoid making them yourself. This can help you build confidence when it comes to investing, giving you positive momentum for reaching your long-term goals.
Get started on your investing journey with these tips for avoiding some of the most common mistakes.
Mistake No. 1: Putting all your eggs in one basket
They say variety is the spice of life. Diversification has always been a byword of a healthy portfolio—and it’s also a way to help alleviate the stress of market turbulence. What you’re trying to avoid is putting too much of your money in one company or asset, an action that has been the downfall of many investors. If you’re properly diversified, it’s not as big a deal if one of the assets in your portfolio doesn’t perform.
In the past, diversification may have meant including a mix of stocks and bonds among your assets. Now, “one of the best ways to diversify is through investing in mutual funds or exchange-traded funds (ETFs),” says Brian Ford, Truist’s head of financial wellness.
These types of funds, which are put together by teams of experts, take a lot of the guesswork out of picking stocks. You can easily diversify by choosing a variety of funds, such as ones that focus on small or large companies (often referred to as small-cap or large-cap stocks, respectively), foreign stocks, or even specific sectors, like energy or consumer goods. ETFs such as those benchmarked to the S&P 500 are extremely popular for their consistent, steady growth.
Mistake No. 2: Not thinking big picture
When investing, play the long game. It’s important to know why you’re investing and to keep your eyes set on your long-term goals.
“When COVID-19 hit and the market took a dive, our natural inclination was to think, ‘Should I just cut my losses now and sell?’” says Ford. But in 2020, that kind of short-term thinking would’ve landed an investor in a disadvantaged position, as the market took a surprising upturn. Don’t focus on immediate returns, advises Ford, but rather on where you might want to be a few years from now—or even later in life.
Consider what you’re investing for, in addition to what you’re investing in, adds Bright Dickson, Truist’s resident expert on positive psychology. For example, if you’re passionate about climate change and conservation, you can align your values with your investments, and consider environmental, social, and governance (ESG) investing.
“Money is simply a conduit to what we really want in life, so keep your eye on those goals and values,” she says.
Mistake No. 3: Letting emotions drive decision-making
“Emotions and investing are like oil and water: They don’t really mix,” Ford cautions.
For example, people see the market skyrocketing, “and they get financial FOMO—they start buying at inflated prices because they don’t want to miss out on the party.”
On the other hand, people may see the market tanking and decide to sell, but that’s typically counterproductive for the long term.
One way to prevent the common investing mistake of emotional decision-making is to acknowledge your feelings, know that they’re normal, and then work to calm or counteract them. Simply looking at your portfolio less might help. Remind yourself that it’s normal for the market to have peaks and valleys. And if you do find you’ve already made a mistake—like buying a stock or fund at a high price and watching it lose money—don’t beat yourself up.
“Instead of getting down on yourself, identify that negative self-talk and ask yourself, ‘Can I learn from this instead of getting upset with myself?’” suggests Dickson.
Mistake No. 4: Investing inconsistently
Slow and steady wins the race. Avoid worrying about the ups and downs of the market—instead, commit to a consistent investing strategy like dollar-cost averaging, says Ford. With dollar-cost averaging, you put a fixed amount of money into the market at regular intervals, such as weekly, biweekly, or monthly.
“That means putting money into your 401(k) every month, regardless of whether the market’s doing really well or poorly,” Ford says. “This allows you to avoid emotional buying or selling, because you’re putting the same amount of money in consistently, month in and month out, whether the market is overheated and overpriced or undervalued.”
You never know what the market is going to do next month, but by investing at regular intervals, you’re buying both the ups and the downs, which helps average the cost of your investments.
Mistake No. 5: Not talking with experts
Finally, a great way to ease your mind when it comes to avoiding investing mistakes is to work with a trusted expert, like a financial advisor.
“Everyone needs a coach—the best athletes in the world have coaches,” Ford says. “A financial advisor is not going to give you all the answers and do the work for you, but they’ll provide you with some guidelines. And when you’re losing your mind because the market’s going down and you call your financial advisor, they’ll remind you to relax and focus on the long term.”
Investing is an important tool for building financial confidence, which can have a direct impact on your overall well-being. Put these tips into practice, and you’ll find it a little less intimidating.