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What Are Common Mistakes Beginners Make When Investing?

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Navigating the complexities of the trading and investing world can be daunting for beginners, which is why we've gathered insights from seasoned professionals, including CEOs and traders. Starting with the importance of not blindly following investment advice and concluding with the necessity to maintain discipline and avoid emotional decisions, here are the top 15 things that beginners should heed, along with expert tips on ways to gain your stride when learning to invest.

Avoid Blindly Following Investment Advice

One common mistake that beginners should avoid in the trading and investing world is blindly following others' advice or stock picks without conducting their own due diligence. This mistake often arises from a combination of factors, including the temptation of quick profits, social influence, and a lack of understanding of the market.

I've come to realize the detrimental role of greed and impatience in leading people to seek shortcuts to wealth in the stock market. It's essential to recognize that successful investing requires discipline, patience, and a serious commitment. Beginners should learn to be mindful of allowing greed to cloud their judgment and remind themselves constantly that investing demands diligent research and a thoughtful approach.

Similarly, I caution against the dangers of following trends or tips from unverified sources. Whether it's friends, social media personalities, or celebrities, blindly following their recommendations can lead to significant losses. I've seen instances where popular individuals such as Twitter character Roaring Kitty or Andrew Tate influenced mass investment decisions, often resulting in regrettable outcomes for those who followed without understanding the underlying fundamentals. Since we don't know these social media figures' motivations and their sources of information may be unknown, it's essential for beginners to educate themselves independently.

To avoid this mistake, seeking education from reputable sources can provide beginners with a solid foundation of knowledge and skills before making any decisions. By cultivating a disciplined and patient approach to investing and resisting the temptation to chase quick profits or follow a herd mentality, beginners can increase their chances of long-term success and mitigate the risks associated with blind speculation.

David Capablanca, Short-Selling Trader

Act on Research, Not Impulse

One common mistake beginners should avoid in trading and investing is acting on impulse rather than research. Often, new investors get swayed by market hype or fear, leading to poorly-timed trades. We emphasize the importance of a disciplined investment strategy based on thorough analysis and a clear understanding of market fundamentals. Beginners can sidestep this pitfall by setting long-term goals and adhering to a well-constructed investment plan.

Adam Garcia, Founder, The Stock Dork

Heed Bondholder Insights, Avoid Falling Knives

Newcomers often catch falling knives, believing that stocks recover from significant price drops by nature. Instead, distressed equities move as a consequence of the underlying story and the likelihood of bondholder recovery.

Let senior and junior non-convertible bondholders be your guides. If you have no idea where the same company's straight (non-convertible) bonds trade versus par, then you have no business buying the stock. Follow the leader. Bloomberg and the FINRA website provide those bond prices.

Deep discounts from par serve as a precautionary red flag. Original par lenders forfeited principal in order to get away from that borrower's risk.

Debt that trades at 85 was sold by new-issue bondholders, who left 15% of their money on the table in order to avoid possibly losing even more. The stock beneath them is at grave risk of tanking and should only be handled by well-informed investors. If lenders are impaired, that subordinate equity claim is not worth much.

Some other topics worth addressing:

If you want a cash flow stream, buy bonds, not stock. Most stocks can move in one day as much as their annual dividend. That should not serve as a primary reason to buy an equity.

Some dividends are leveraged, meaning that a company with insufficient free cash flow borrowed money to make deceptive distributions using OPM, other people's money. Know where your dividends come from.

Sell covered calls against every liquid long position. Getting exercised is a nice problem to have, considering that the writer never expected the stock to hit that price in the first place.

Dennis Wurst, Senior Distressed Credit Analyst

Personalize Your Investment Strategy

People often have a desire to get rich quickly, so they rely on financial experts and online publications for investment ideas without making decisions on their own. Everyone is different. Everyone has different risk tolerances, goals, and time horizons. Are you looking to invest in fast-growing companies that are volatile or in more stable companies that aren't growing as quickly? What do you want to invest for?

Everyone wants to make money, but why? Are you looking for consistent income for retirement? Are you looking for a lump sum to pay down debt or to travel? How long do you plan to invest in the company? Are you looking for a short-term or long-term gain?

Investors need to ask themselves these questions because the answers dictate what company/product they invest in, the account they would invest with, and the types of investments that are most appropriate. Each of these needs to be taken into consideration when listening to outside information. Just because it looks good on the internet doesn't mean it's good for you. Investing comes with risks and rewards, but to ensure you are investing in the best, you have to do research on what's best for you.

Ashley Fox, CEO, Empify

Implement Emotional Discipline in Investing

One common mistake that beginners should avoid in the trading and investing world is succumbing to emotional decision-making. This mistake often occurs because beginners may feel overwhelmed by market volatility or influenced by fear, greed, or FOMO (fear of missing out). Emotional trading can lead to impulsive decisions, such as buying or selling assets based on short-term fluctuations rather than long-term fundamentals.

To avoid this mistake, beginning investors can implement several strategies.

First, they should educate themselves about investment principles and develop a solid understanding of risk management techniques. By gaining knowledge and staying informed about market trends, beginners can make more informed decisions based on facts rather than emotions.

Second, beginners should establish a well-defined investment plan with clear goals, risk tolerance, and a diversified portfolio strategy. Having a plan in place can provide a roadmap for investment decisions and help investors stay disciplined during market fluctuations.

Additionally, beginners can benefit from seeking advice from experienced professionals or mentors in the investment field. By learning from the experiences of others and seeking guidance from reputable sources, beginners can gain valuable insights and avoid common pitfalls in the trading and investing world.

Richard Dalder, Business Development Manager, Tradervue

Embrace Portfolio Diversification Early

One common mistake that beginners often make in trading and investing is failing to diversify their portfolio. Based on my experience, especially during the time I spent at LoanDepot overseeing financial analysis, I observed that many new investors put a significant portion of their capital into a single stock or market sector, hoping for high returns. This approach can lead to substantial losses if that particular investment does not perform well.

This mistake typically arises from a combination of enthusiasm and a lack of knowledge about market dynamics. Beginner investors might be influenced by recent success stories or hot tips without proper consideration of the broader economic environment or the specific challenges that a company or sector might be facing.

To avoid this pitfall, I recommend adopting a diversified investment strategy. During my tenure in corporate accounting, particularly dealing with the complexities of mortgage banking investments, I learned the importance of spreading investments across various asset types and industries. This not only mitigates risk but also positions the portfolio to capture growth from different sectors of the economy over time. Thus, it's crucial for beginning investors to educate themselves on the fundamental principles of asset allocation and to consider seeking advice from experienced financial advisors to tailor a diversified investment plan suitable to their long-term financial goals.

Sean Autry, CPA, Owner, PlushStone CPA

Develop a Solid Trading Plan

A common mistake beginners make in trading and investing is neglecting a solid trading plan. Many newcomers dive in without a clear strategy, driven by the allure of quick profits and the firm's capital. This mistake often stems from overconfidence and a lack of understanding of market complexities. To avoid this pitfall, beginners should develop a detailed trading plan that includes entry and exit criteria, risk management rules, and profit targets. Back-test the strategy using historical data and demo accounts before trading live. Moreover, firms often have specific guidelines, so familiarize yourself with their rules and align your plan accordingly. By sticking to a well-defined plan, continuously learning, and refining strategies based on performance reviews, beginners can build disciplined habits and navigate the trading world more effectively, avoiding costly errors that stem from impulsive decision-making.

Blake Olson, Owner & CEO, Smart Prop Trader

Resist Herd Mentality, Focus on Research

One common investing mistake beginners often make is following the herd mentality. This occurs when investors mimic the actions of others without conducting their own research. It frequently leads to poor timing and financial losses. To avoid this, focus on independent research and develop your investment strategy based on sound investing principles (e.g., diversify your portfolio and think long-term). By making informed decisions and not simply following the crowd, you will position yourself for greater success in the investing world.

Ignacio Ramirez Moreno, CFA, Fixed Income Advisor

Invest Discretionary Funds, Not Essentials

Even the best investors in the world lose sometimes—probably more than we all think they do. The market is volatile, stocks fluctuate, and nobody can predict the future exactly. Unless you're a fortune-teller or are extremely lucky, you will most likely lose quite a bit until you learn how it all works. Dip your toes in the water before jumping into the ocean. Start by putting aside money your livelihood doesn't depend on and learning the ropes. Start with a few bucks in companies you currently know, use, and believe in. Then, when you gain a better understanding of the market, grow your portfolio.

Rani Sweis, CEO, AtticSalt

Conduct Thorough Research Before Investing

Neglecting to conduct thorough research before making investment decisions is a mistake that often occurs due to a combination of overconfidence and the allure of quick profits. This leads beginners to make impulsive decisions based on hearsay or fleeting market trends without understanding the fundamental value or risks involved.

To sidestep this pitfall, beginning investors are advised to cultivate patience and dedicate time to learning about market analysis, investment strategies, and the financial health of entities in which they consider investing. Emphasizing education and due diligence can significantly mitigate risks and pave the way for more informed and strategic investment choices.

Michael Gargiulo, Founder, CEO, VPN.com

Adopt a Long-Term Investment Mindset

Investing should be done with a long-term mindset. If you go into it with a short-term outlook, trying to double, triple, or 10x your money immediately, you are set up for failure, and you might as well just go to a casino and play some blackjack.

Allison Dunn, CEO, Head Business & Executive Coach, Deliberate Directions

Avoid Emotional FOMO and Panic Selling

FOMO or Panic Selling. One common mistake beginners should avoid is letting emotions drive their investment decisions. Many new investors fall victim to the fear of missing out (FOMO) or panic selling during market downturns. To avoid this mistake, beginners should focus on developing a well-researched, long-term investment strategy and stick to it, regardless of short-term market fluctuations. Educating yourself about market fundamentals, diversifying your portfolio, and setting realistic goals can help you maintain a level-headed approach to investing. Remember, successful investing is a marathon, not a sprint, and emotional decision-making can be detrimental to your financial health.

Sean Clough, President, Sales and Marketing, Harmony Lab & Safety Supplies

Resist Hype Train, Practice Rational Investing

One all-too-common mistake that beginners make in the trading and investing world is jumping on the hype train at the wrong moment. It's crucial to resist the temptation and not give in to the fear of missing out (FOMO). An old adage in investing is "buy the rumor and sell the news." However, most rookies tend to buy into a stock after it has already experienced exponential growth, right as the hype reaches its peak.

This mistake often occurs because beginners get swept up in the excitement and emotions of seeing rapid gains, thinking they'll miss out if they don't act quickly. To avoid this pitfall, it's essential to approach investing as a rational decision-making process rather than an emotional one.

Beginner investors should focus on conducting thorough research and analysis before making any investment. Look at the fundamentals of the asset, consider the long-term prospects, and assess whether the current price reflects its true value. Always keep your FOMO in check and strive to make informed, well-thought-out decisions.

Remember, investing should be about steady, sustainable growth rather than chasing after a quick, risky moonshot. Patience and discipline are key to building a successful investment portfolio.

Jonathan Buffard, Digital Marketing Director, Bottom Line Marketing Agency

Prioritize Learning Over Trend Following

As an experienced investment banker who—more recently—founded a company operating in the precious metals industry, I believe that many beginners tend to make a common mistake in trading and investing: they usually get swayed by trends or new opportunities without conducting the right research. This behavior is typically driven by a fear of missing out (FOMO), which leads to hasty decisions based on short-term market fluctuations or sensational news rather than thoughtful analysis.

From what I've seen, this technique can result in significant losses once the initial hype subsides and the market goes through a correction. To mitigate this risk, new investors should prioritize complete learning, consistent research, and careful consideration before committing to any investments. It's important to have a clear understanding of the investment type—be it stocks, bonds, or precious metals—and to develop a strategy that aligns with your financial goals and risk tolerance.

By maintaining discipline and avoiding the search for quick gains, you can gradually build an impressive and successful investment portfolio over time. This patient and informed technique is crucial for long-term financial growth and stability.

Brandon Thor, CEO, Thor Metals Group

Maintain Discipline, Avoid Emotional Decisions

As an entrepreneur, I have witnessed firsthand the common pitfalls that beginners often encounter when diving into trading and investing.

One prevalent mistake beginners should avoid is letting emotions dictate their investment decisions. The stock market can be volatile and unpredictable, and it's easy for newcomers to get caught up in a frenzy of fear and greed. This emotional roller coaster often leads to impulsive decisions, such as selling off investments during market downturns or chasing hot stocks without proper due diligence.

I vividly remember my early days as an investor when I let my emotions cloud my judgment. During a market downturn, I panicked and sold off a significant portion of my portfolio, only to watch the market rebound shortly after, leaving me with substantial losses and regrets. This harsh lesson taught me the importance of maintaining a level head and sticking to a well-defined investment strategy.

To avoid this common pitfall, beginners should adopt a disciplined approach to investing. This involves creating a comprehensive investment plan that aligns with their risk tolerance, investment horizon, and financial goals. By establishing a solid framework, investors can make decisions based on sound reasoning rather than fleeting emotions. Additionally, beginners should educate themselves on fundamental analysis, diversification, and risk management strategies to navigate the market more effectively.

Moreover, beginners must manage their expectations and understand that investing is a long-term endeavor. Unrealistic expectations can lead to disappointment and emotional decision-making. Beginners should be patient, stay the course, and avoid the temptation to chase quick gains or react impulsively to market fluctuations.

Successful investing requires a cool head, a well-defined strategy, and a commitment to continuous learning.

Abid Salahi, Co-founder & CEO, FinlyWealth