New investors don’t know what they don’t know.
When you don’t know much about a subject, sometimes the first advice you come across appears solid.
Thoroughly research a company so you know if the stock would be a good investment for you. Don’t buy when stock prices are high. Think carefully before you make your company retirement plan investment choices.
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Turns out these may not be your best moves.
Remember the Hippocratic Oath, says Rob Cavallaro, chief investment officer at the advisor RobustWealth, in Lambertville, New Jersey.
“First, do no harm,” he said. And competing against people like Warren Buffett and the smartest hedge funds if you try to time the market is a way to come to harm. “It’s tough to win against people like that.”
Young investors think they can get rich quickly, says Marcello DePascale, an accredited investment fiduciary at the Barnum Financial Group in Shelton, Connecticut.
“Avoid the lottery picks, the bitcoins, the tips from friends on the next company that’s going to explode,” DePascale said.
Instead, turn your attention to investing in things such as broadly based exchange-traded funds or mutual funds that align your investing with what you’re trying to achieve.
The better strategy is to invest in broadly based mutual funds or exchange-traded funds — a low-cost vehicle that allows you to get an investment portfolio at a great price.
Watch out for these five moves. They may be tempting, but they won’t get you where you want to go.
1. Researching the best stocks
Trying to buy individual stocks is a top mistake, says Thomas Henske, a certified financial planner with Lenox Advisors in New York. The thinking goes something like this: “OK, I’m going to research one company and become really familiar with that company, and then I’m going to buy that stock.”
That approach carries a lot of risk. “If it doesn’t turn out the right way, they get turned off investing forever,” Henske said. “And if does work out, they overestimate their stock- picking abilities.”
The better strategy is learning about terms like sectors, diversification or asset classes. It will be much more helpful, Henske said.
The other danger: Busily researching individual stocks — whether it’s large, familiar companies, such as Disney or McDonald’s, or lesser-known firms the investor thinks will pay off in the future — can eat up valuable time someone could spend learning about investing principles that actually provide some value.
2. Thinking it over
Many investors just don’t get the power of investing over time, says Cavallaro. As the Chinese proverb says, “The best time to plant a tree was 20 years ago. The second-best time is now.”
People new to investing know the stock market is a good place to invest. But they don’t understand what it takes to build wealth (patience, consistency and a few decades).
Those just entering the workforce should take advantage of the 401(k) offered by their company, if there is one, Cavallaro says.
Don’t spend time agonizing over which investment options to choose in your plan. Start investing as soon as you’re eligible. You can always make changes later on.
3. Making comparisons
It’s tempting to compare different investment choices.
Someone has a CD at a bank, and they view it against the returns of the S&P 500 and how it’s performing currently. It would look pretty different, of course, if they compared it to that same stock market index in 2008, Henske says. (Just for fun, Henske recommends looking up the S&P 500 for the day you were born.)
The thought process goes like this: “I don’t like how this is doing compared to that,” Henske said. “And ‘this and that’ are apples and oranges.”
Perhaps someone has an international equities portfolio that is underperforming their U.S. equities portfolio. They conclude that U.S. equities are always better. “You have to be able to compare like to like, which is near impossible,” Henske said. “There’s always some difference that might be material.”
4. Waiting for the right time
New investors know the stock market has its ups and downs. But they get tense when the stock market is rocky. They may be tempted to buy when prices rise and sell when they fall. They may be tempted to check their portfolios too often.
It’s time in the market, not timing the market that matters, says Brent Weiss, a CFP and co-founder of Facet Wealth in Baltimore. “Trying to time the markets is a fool’s errand,” he said.
“Markets can be volatile, but they have historically trended in a positive direction,” Weiss said. The single biggest investing mistake people can make is selling when markets are low.
“[Say] the market goes down 10% and you sell [your investments] and put them in cash,” Henske said. “When the market goes back up, which it always does, you haven’t participated in the up — and you’ve locked in that loss.”