Five beginner investor mistakes (and how to avoid them!)

Mistakes are part of learning anything new. Investing is no exception. When you’re getting started as an investor, you’re bound to make a few mistakes here and there as you figure out what you’re doing. We thought we’d outline some of the more common pitfalls that new investors fall into. If you can avoid these, you’ll be well on your way to making investing a positive habit that you stick to for the long term.

Mistake #1: taking the short-term return

We’re big fans of investing for the long term. If you invest your money for ten years or more, you have a better shot at earning higher returns than if you invested for fewer than ten years.

While that sounds great in theory, it’s difficult in practice, especially because long-term, riskier investments tend to move around a lot in the short term.

When this happens, beginner investors may panic and sell when things take a dip (see mistake #2)—but they also might sell too early when things go up! This is called ‘timing the market’, or trying to sell when prices are high and buy when prices are low. You can read more about timing the market in this post about investing for the long term.

Here’s how it works: let’s say you invest $10, with the intention of waiting ten years to get your returns. After one year, your investment gains a lot of value, and it’s suddenly worth $15! You’re nine years early, but you’ve made a 50% return, so you sell.

This might feel great, but if you do this, you’re potentially giving up even higher returns in the future. If your $15 continues to increase in value by an average of 5% a year, it’ll be worth $22. If you’d just stuck to your long-term time horizon, you would have made another $7.

Now imagine that you’d invested $100, $1,000 or more—suddenly, your fast buck is costing you some pretty serious money.

How to avoid this mistake

Choose a time horizon, preferably nice and far in the future—and stick to it, no matter what happens! If you don’t need the money, there aren’t too many reasons to sell early, regardless of whether your investment has gained or lost value.

Mistake #2: locking in losses by selling early

Let’s say you have $100 that you want to invest for 10 years. Since 10 years is a long time horizon, you choose a higher-growth, higher risk investment that will move around a lot in the meantime. After three months, your investment loses value. Now your $100 is worth $90. Stink!

This is where a lot of early investors make a mistake: they see their investment lose value in the short term, so they try to cut their losses by selling. This may be a big mistake, because you’re actually locking in a loss.

Your investment only really gains or loses value when you sell and turn it into cash. So if you sell in your first year for a loss, that’s it. If the investment’s value increases in the second, third or fourth year, you don’t get those returns, because you sold early.

This is an easy mistake to make, because it’s quite scary to see your investment lose value! If you find yourself in this situation, just take a deep breath and remind yourself of your time horizon. Ask yourself two questions: “did I plan on selling today?” and “has something significant changed with the investment that makes me think it’ll no longer be more valuable in the future?” If the answer is no, then you have nothing to worry about—there’s no reason to panic and sell early, just because the investment roller coaster took a dip.

You can see this by looking at the NZ Top 50 share price over the past few months. In October 2018, it was worth around $2.70. Then there was a bit of a dip—in January 2019, a share was worth $2.48. Anyone who bought in October and sold in January would have lost 22 cents per share.

But then things turned around—that same investment is worth around $2.80 a share now. So investors who hung on would now have an investment worth 10 cents per share more than it was worth in October. That’s close to a 4% return in just over six months!

How to avoid this mistake

You can avoid this mistake the same way you avoided mistake #1—pick a time horizon, and stick to it. Sell your shares only if you reach your time horizon, or need (not want!) the money right away. It takes nerves of steel, but we promise it’s worth it!

Mistake #3: not enough, or too much, information

When it comes to information about investing, there’s a bit of a sweet spot. On one end of the spectrum, you want to have enough information to feel confident. Otherwise, you’re less likely to invest in the first place! Educate yourself on the basics, so you understand concepts like time horizons, diversification, and how to get started.

But then there’s the other end of the spectrum. Some new investors get stuck into reading all about their investments. Is the global economy going to go into a recession? Or is it going to boom? What about that trade war we keep hearing about? What about Brexit? There’s an election coming in Australia—does that matter? And so on, and so forth.

When you’re consuming heaps of information and trying to apply it to your investments, it can be really hard to separate the signal from the noise. After all, big brokerages and managed funds hire whole teams of people to do this, and they still often get it wrong!

How to avoid this mistake

Read up on the basics (our blog is a great resource), but try not to scare yourself by reading every piece of news that relates to your investing. After all, if you have a long time horizon, today’s news stories are unlikely to have much of an effect on your investment in ten or twenty years.

Mistake #4: waiting for the bargain that never comes

If you look at the ups and downs of the share market, it’s easy to see (in retrospect) where the best buying opportunities were. Wouldn’t it be great to invest when shares are $1, and immediately have them shoot up in value to $3, $4 or more?

The problem with this is that bargains are very obvious in hindsight, and very hard to find ahead of time—unless you have a crystal ball. So you can end up waiting for the price of your investment to fall just a little more every day before you take the plunge. Next thing you know, it goes up, and you’ve missed your bargain!

How to avoid this mistake

Rather than trying to wait for bargains and time the market, it’s much easier to invest the same amount, on a regular basis—also known as dollar-cost averaging. This means that sometimes you buy when prices are high, and sometimes you buy when prices are low—over time, your purchase price averages out, and you don’t have to worry about whether you got a bargain or not.

Mistake #5: forgetting about the magic of time

Some would-be investors avoid investing because they think you need to invest a lot of money. If you don’t have a lot of money, why bother?

But remember that investing for the long term means you don’t need a lot of money at once. Say you want to invest a total of $20,000. You may not have that kind of money sitting in your chequing account! But if your time horizon is twenty years, and you intend on investing once a week, you only need to come up with $20 a week. That’s a lot more manageable than $20,000 all at once.

What’s more, this gives you compound returns. That’s when your initial investment makes a bit of return, then those returns make a bit of return as well. Eventually, you’ll be making returns on your returns’ returns!

The cool thing about compound returns is that anyone can get them—you don’t need to have heaps of money, you just need to have heaps of time. So the longer you wait to invest, the more compound returns you give up, and the sooner you invest, the more compound returns you get. It’s a real win/win.

How to avoid this mistake

Time is your most valuable asset! So just choose an affordable regular investment amount, a long time horizon, build a habit and stick to it. If you can do that, you’ll be well on your way to avoiding the most common investor mistakes and building yourself a great future.

Ok, now for the legal bit

Investing involves risk. You aren’t guaranteed a return, and you might lose the money you started with. Before investing, you should read your fund’s product disclosure statement. It contains the investment objectives, risks, fees and other information. You should carefully consider this information in relation to your investment time frames and goals.