Graham Stephan Says People Fall Victim to This Problem When Investing

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It’s a mistake that could cost you. 

There’s a reason it pays to invest money you don’t need for near-term financial goals or emergencies. When you put money into a savings account, it can earn some interest. When you invest money in a brokerage account, it can grow into a much larger sum over time.

In fact, these days, high-yield savings accounts are paying around 3% interest, which is a vast improvement from a year ago, where you were largely looking at less than 1%. But if you invest in stocks and other assets with a lot of growth potential, you might snag a 9% return or more.

But while a lot of people see the value of investing money, they tend to make a big mistake when things don’t go their way. And that’s something you’ll want to avoid.

Don’t let fear drive you to make poor decisions

While there’s the potential to make a lot of money in the stock market, unfortunately, the opposite can happen. You might put $1,000 into a brokerage account only to have your balance fall to $500 several months later. And that can be disheartening.

The problem, though, is that when market conditions change for the worse, a lot of investors respond by rushing to sell off assets in a panic. And that’s where they can run into trouble.

One big rule of investing is that you don’t lose money until you actually sell off investments at a price that’s lower than what you paid for them. So let’s go back to our example — your $1,000 investment is now only worth $500. If you succumb to fear and liquidate your portfolio, you’ll lock in a $500 loss. If you don’t sell, you won’t lose any money.

What might then happen is that the market slowly improves and the value of your portfolio increases to $700. And a few months after that, it might be worth $1,100, which is $100 more than you had when you started. But if you don’t sit tight in situations like that, you’ll risk losing money when you could instead be gaining money.

Many people, however, do give into fear. In a recent tweet, real estate and investing guru Graham Stephan said, “The problem with investing is that most people buy with excitement and then subsequently sell with panic.” And so if you’re going to invest, it’s important to remind yourself not to let nerves inform your decisions.

Take a long-term approach

One reason so many investors end up selling in a panic is that they’re not thinking long term. If your portfolio value shrinks from $1,000 to $500 in a few months’ time, you might rush to liquidate your assets and stop the bleeding. But if you remind yourself in that situation that you’re in it for the long haul, then you can avoid losing money at all. And better yet, you’ll be less likely to panic, because you’ll realize there’s plenty of time for your portfolio to recover.

All told, it’s a good idea to take a level-headed approach to investing. And that means not selling the moment things don’t go your way. If you pledge not to act out of fear, you can avoid losses and set yourself up for long-term success.

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