When you start investing, there are lots of things to focus on doing correctly. You want to make wise investments, so you do the things that ideally help you do that.
However, there are also plenty of things to be sure NOT to do. It's just as important to know what to avoid as it is to know what you should do when you start investing.
6 Things to Avoid for New Investors
When you begin investing, there are a lot of intimidating factors to keep in mind. We are talking about your hard earned money after all! Everyone wants to make good investments and not lose money. Keep these common pitfalls in mind as you dip your toes into the investing waters.
Don't Put All Your Eggs in One Basket
Diversification is a huge part of being a successful investor. If you make one large investment instead of spreading your money to multiple investments, you are putting your money at a higher risk.
If all your money is in one investment, and the bottom falls out of that investment, you'll have a much harder time getting your head back above water than if it was just a small portion of your diversified portfolio.
Don't Stretch Yourself Too Thin Financially
Investing is really important, but it's not the most important thing in your budget. If you really need the money you plan to invest for something else important, or might need it in an emergency, you should consider bulking up your savings a bit before making an investment with money you actually kind of need.
If making an investment and losing your money right away would be an immediate and major hardship for you, that money probably shouldn't all be going to your investment portfolio right now.
Don't Get Wrapped Up in Identifying the "Next Big Stock"
There's often a lot of buzz about what the next big stock might be, but it's virtually impossible to actually know ahead of time in most cases. Don't pay too much attention to the word on the street when making investment decisions. Chasing the next big thing, especially as a beginning investor, can be both exhausting and potentially catastrophic for your investments.
Don't Go All-In Right Away
There's a lot to learn about the various ins and outs of investing, so don't dive in head first right off the bat. Spend some time getting your feet wet and learning more about the investments you are interested in first. Start out with some smaller investments and see how that goes before investing more.
If you want a super low risk way to learn, consider a virtual stock simulator that allows you to learn more about investing without actually using money. While you aren't reaping any financial benefits from this, you are learning valuable insights that could help you when you feel comfortable enough to actually invest.
Don't Leverage Up to Buy More Stock
Bottom line: don't borrow more money than you have just to invest it. If the investment goes awry, not only have you lost your own money, but you are further in the hole due to debt from borrowing even more.
Don't Pay Attention to Penny Stocks
On the surface, penny stocks are enticing. They might especially catch the attention of a new investor that is looking for relatively low-level investments to make as they learn. However, penny stocks tend to actually be pretty high risk investments due to the volatility that comes with their small size.
Ask Yourself This Before You Invest
Do you feel like you are ready to make your first investment? Here are a few final questions to ask yourself before you jump in.
Do you feel confident you understand what you're about to invest in?
Make sure you are sticking with investments you actually understand and have a good grasp on. This might require a significant amount of research and maybe even mean you have to meet with a professional to help you feel confident that you fully understand the investment you are about to make.
How will this investment make you money?
Investing is all about watching your money grow, so it is important to see a clear path to earning a return before making an investment. This might look many different ways for different investments, and it will require you to also think through some "what-ifs" that could make earning a return challenging.
How much will it cost me to make this investment?
Fees and other additional costs can sneak up on you quickly if you don't make sure to pay attention to them. Know exactly how much you are paying to make an investment before deciding to do so. Carefully consider the overall costs associated with not just buying and selling an investment but also managing it in between.
How risky is this investment?
Unfortunately, it's going to be impossible to find an investment that has absolutely no risk involved. Without the ability to see into the future, there will always be an inherent risk level to investing. Some investments are going to be riskier than others, however, so weighing that level of risk and considering how much you can afford to lose is important.