These Are the Top 5 Mistakes Investors Make. Here’s How to Avoid Them

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

If you can avoid mistakes, you can be a successful investor. 

People who are new to investing sometimes think that the most knowledgeable, expert investors have the most success. After all, it seems pretty logical. In many pursuits, experts do a whole lot better than amateurs.

But investing is one of the rare exceptions where beginners can do just as well as experts. Personal finance enthusiast and investor Graham Stephan recently compared investing to amateur tennis. He says you don’t need to be an expert to win at investing; all you need to do is avoid unforced errors.

So, what should you avoid? Stephan pointed out the top five mistakes investors make. Here’s what they are and what to do instead.

1. Going all in on one stock

No matter how much you like a company, never make it your only investment. As Stephan explains, there have been more than 28,000 companies traded on U.S. markets since 1950, and 78% of them aren’t around anymore.

A golden rule of investing is to build a diversified portfolio. If your money is invested in various stocks, you’re not reliant on any single company’s success. There are two ways to have a diversified investment portfolio:

Pick stocks yourself and invest in at least 25 to 30 companies. This can be time-consuming, so it’s only recommended if you want to actively manage your portfolio. If so, you can select stocks and build a portfolio on any of the top stock trading platforms.Choose an investment fund that invests your money in a large number of stocks. Index funds are a popular choice here. Total stock market funds and S&P 500 funds are both good, easy ways to invest.

2. Trying to time the market

Timing the market is when you attempt to predict price movements and use that for your investment decisions. This is a poor strategy because it’s nearly impossible to reliably predict market movements. Even if you could, a study by Charles Schwab found that people who simply invest on a regular basis would get comparable returns to a hypothetical investor with perfect market timing.

The biggest risk with timing the market is that you’ll get your predictions wrong. If that happens, you could lose money. Or, you may miss out on the market’s best days, which will cut into your returns. Stephan noted that if an investor stayed in the market from 1997 to 2017, they would have earned 7.2%. But if they missed just the 10 best days over that 20-year time period, their return would drop to 3.5%.

Don’t try to jump in and out of the market. Set a schedule, such as investing $1,000 on the 15th of each month, and stick to it.

3. Expecting returns in line with the market average

Historically, the average stock market return is about 10% per year. But that’s the average from a wide range of yearly returns. Some years will see the market grow by 20% to 40%. In others, it will drop by 15% or more. It’s actually rare to see annual returns in the 8% to 12% range, as Stephan mentions that this has only happened five times since 1926.

New investors occasionally get discouraged when their portfolios don’t grow like they thought they would. Some hesitate to continue investing or even consider selling at a loss.

It’s important to understand that your money isn’t going to steadily grow by 10% year after year. There will be ups and downs. Keep a long-term perspective and don’t let down years bother you.

4. Putting all your eggs in one type of asset

Many investors go heavy on stocks, since the stock market is a proven way to build wealth. Stephan recommends a more diverse portfolio with a mix of assets that will do well in all economic climates. He likes the golden butterfly portfolio, where the investor allocates equal 20% shares into:

U.S. large cap stocksU.S. small cap stocksLong-term treasuriesShort-term treasuriesGold

This is the one debatable recommendation on the list. Truth be told, younger investors are fine sticking with an S&P 500 or total stock market index fund. When you’re investing for decades in the future, you don’t need to get too complicated with asset allocation.

As you get closer to retirement, it’s a good idea to balance out your portfolio with less volatile securities, such as bonds. The golden butterfly portfolio is an option, but you’ll have a large portion of your money in gold, which is volatile. Also, returns could lag compared to a more stock-heavy portfolio.

5. Not sticking with it

Investing is the most effective way to build wealth. It’s especially powerful when you invest over a long period of time, such as 20 years or more. That gives your money plenty of time to grow and earn compound interest, meaning interest on top of the interest you’ve already earned.

But to maximize your returns, you need to be consistent. If you only invest every now and then, or if you stop after a year, you won’t earn nearly as much as you could’ve.

Commit to investing a specific amount every month. Some people start with 10% of their income, but you can use whatever amount works for you.

Investing doesn’t need to be difficult. If you have a diversified portfolio and invest regularly, you’ll build wealth. The only other thing you need to do is watch out for mistakes along the way, like trying to time the market or investing too much in a single stock.

Our best stock brokers

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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.Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Lyle Daly has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.

 Read More