3 Costly Mistakes That Young Investors Make

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Investing mistakes can cost you time and money. Learn about some of the typical mistakes that young investors make so you can avoid them. 

Getting started with investing while you’re young is one of the best financial decisions you can make. When you start early, your money has more time to grow. That can make a massive difference in your finances.

To give you an example, let’s say you start investing $500 per month at age 25. If you get an 8% annual return, then after 40 years when you turn 65, you’ll have $1.55 million. If you start at 35 and invest for 30 years, you’ll have $679,699 — a difference of over $850,000.

So, if you’re investing at a young age, you’ve already taken an important first step. But there are also some common and costly mistakes young investors make that can negatively affect how much your money grows.

1. Taking on too much risk

Investing has historically been a successful way to build wealth, but it takes patience. On average, the stock market grows at about 10% per year. Returns vary quite a bit from year to year, but over long periods, that’s how it has averaged out.

While this can grow your money significantly over the long run, you may want faster results. That’s why many young investors take the high-risk, high-reward approach.

Some put most of their money in Bitcoin (BTC) and other cryptocurrencies. Others trade options. When you hear about people who put everything into crypto and made millions, slow and steady may not seem good enough.

Keep in mind that these investments are long shots. You’re a lot more likely to lose money than you are to make money. It’s OK if you want to add a little excitement to your portfolio. But you should have at least 90% to 95% of your money in safer investments, such as an exchange-traded fund (ETF) that invests your money in the entire stock market.

2. Not investing regularly

Many investors start by investing a large amount of money they’ve saved. Maybe you tucked away $3,000, $5,000, or $10,000, and made that your first big investment. That’s a great way to start, but it’s also important to continue investing regularly going forward.

Investing works best as a financial habit, not a one-off. If you invest $5,000 once and earn 8% per year on it, then in 40 years, it will grow to $108,623. If you invest $5,000, plus $250 per month for those 40 years, you’ll end up with $885,792.

When you invest regularly, you end up investing more overall. To make this easy, decide on an amount you can afford and automate your investments. Many of the best stock brokers give you the option to set up automatic investing. It’s also something you can set up with your employer if it offers 401(k) plans.

3. Spending too much time managing your portfolio

You might think that the more time you put into investing, the better you’re going to do. That makes sense in other parts of life, but it’s not always the case here.

It’s hard to beat the market. Even many professionals don’t manage to do it. Warren Buffett famously made a bet at the end of 2007 that the S&P 500 (an index of 500 of the largest publicly traded companies) would outperform professional hedge funds over the next 10 years. None of those professionally managed funds came close to the S&P 500’s performance.

You could do well by analyzing stocks and carefully managing your portfolio. But you could also likely get similar or better returns by just passively investing in a fund that does the work for you. S&P 500 ETFs are a popular choice for this.

This also means you’ll have more time to focus on other areas of your life, like increasing your income. As a young adult, that’s a much better use of your time. Raising your annual income by $5,000 or $10,000 will benefit you much more than spending hours every week to maybe make a little more on your investments.

Don’t feel bad if you’ve done any of these. They’re common, and they’re all mistakes I made myself. The good news is that they’re also easy to avoid. If you minimize risk, make investing a habit, and don’t spend too much time on it, you’ll be better off as an investor.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.

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