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7 common newbie investor mistakes to avoid

- August 12, 2021 4 MIN READ
Newbie investor mistakes to avoid

Being aware of the most common newbie investor mistakes can save you a ton of emotional energy and financial pain down the track.

You’re at a party, and after a few drinks your friend lets it slip they’ve “actually just invested in TechHub Ltd, apparently one of the hottest tech startups in Australia at the moment.”

“Oh right!” you say, this being one of the first times you’ve heard your friend talk about investing. “What does it do?”

“Oh, you know, something to do with facilitating other startups, I’m not too sure, I got a tip from a colleague at work. BUT the market is dropping so we’re catching it before it bounces again. AND I’m going all in because imagine the returns if I double my money within 2 months. And wait for it, the best thing… it’s only seven cents per share, how cheap is that?!”

It’s at this point you realise your poor (potentially soon to be poorer) friend, has committed several common investing mistakes. They’ve invested in something they don’t know about, they’ve tried to time the market and they’ve let their emotion get in the way of their logic. Being aware of newbie investor mistakes like these could save you emotional energy and financial pain down the track.

So, here are the seven most common newbie investor mistakes you’re not going to make.

1. Investing in companies you have no idea about

Warren Buffett — arguably the world’s best investor—says you shouldn’t invest in companies that you don’t understand.

If you don’t understand their business model, their product or services, or their customers, then stay away. If you want to be in the market but don’t have the time to sit down and get your head around individual companies (and trust us, it takes a lot of time!), then the best approach should be to look at exchange-traded funds (ETFs) – they offer reduced-risk exposure to a broad range of companies. Their managers do the work, so you don’t have to.

2. Letting your emotions get in the way

Emotions are a dangerous thing in the world of investing, so try to ignore them where possible. Despite fear and greed ruling the market, they can kill your returns if they rule you.

The key to separating yourself from your emotions is to look at the big picture. Short-term you may suffer, and it’ll hurt to look at your stocks slide, but markets always recover.

Remain focused on your long-term goal, don’t log into your trading account when you know there’s a downward trend – it’ll only compound your feelings of loss! Think with your head, not with your heart.

3. Thinking doing more will you there faster

Slow and steady wins the race. Have you heard that before? We’re sure you have and there’s a reason for it – because it works!

Be it at the gym, your career, or building a share portfolio, the best results come with time. A disciplined, steady and patient approach will go a lot further than chasing the 100x bagger in two months.

Investing is a long-term game. Portfolios are designed to grow over time. Having a punt is for the short-term payoff and a recipe for disaster. Keep your expectations realistic in terms of growth and time and you will most likely be rewarded.

4. Too much churn

This flows out of being patient (see above).

Try not to trade your stocks excessively – the more you trade the more you’ll pay. Brokerage fees are getting cheaper, but if you’re constantly trading in and out of stocks, they can still hurt you over time.

Don’t forget the tax as well! You’ll pay capital gains tax on any profits you make, and if those profits aren’t much then perhaps it’s best to keep ownership rather than sell.

5. Trying to time the market

It’s about time IN the market, not timing the market.

Trying to time the market is no doubt going to kill some of your returns. Don’t try to catch the falling knife.

You’ll rarely be able to pick when a market bottoms, and you’ll rarely be able to pick when it’s at the top. Not even the best professional investors can achieve this!

It’s important to remember – most of the returns your portfolio will make will come from your research, investment decision and strategy, not from trying to time the market.

6. Falling in love with a company

It’s easy to fall in love with a company when it does well. You feel great, you picked a winning stock! But never forget that you bought it to make yourself some money.

Keep an eye on the fundamentals that made you buy it in the first place, and if they change, think about breaking-up!

It’s tough, we know. But it’s better to dump the stock, than for it to dump you.

7. Letting pride get in the way

The last of our newbie investor mistakes is letting pride get in the way. If you chose a stock and it’s losing, don’t avoid selling it because you want to wait for it to recover. This is a cognitive error.

Firstly, you are not selling a losing stock and there’s no guarantee that it won’t keep falling.

Secondly it’s opportunity cost – the money could be better used in another investment. Preferably one that doesn’t make any of the newbie mistakes on this list!

This is an edited version of an article that originally appeared on Equity Mates.