There is no better way to build wealth than with investing. But investing also punishes people who don’t understand their investments or are overly active, especially in 2023.
If you're new to investing, or even if you've been doing it for a while, it's important to be aware of the most common investing mistakes and how to avoid them.
Here are the top 7 investing mistakes to avoid in 2023.
Investing Mistakes You Must Avoid in 2023
Mistake 1: Not Having a Plan
A big mistake investors make is not having a plan. Investing without a plan is like driving without a map. You might get lucky and arrive at your destination, but you'll often end up lost.
Develop a plan that aligns with your objectives. Here is how:
Identify investment goals: Are you investing for retirement, buying a house, or saving for your child's education? Defining your goals will help you determine how much money you need to invest and what type of investments you should consider.
Determine risk tolerance: Risk tolerance refers to the willingness to accept risk when investing. Some investments carry more risk than others, and it's important to choose investments that align with your risk tolerance. Generally, bonds or other fixed-income investments are less risky, while stocks and cryptocurrencies are higher risk.
Choose investments: There are many different types of investments to consider, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Consider diversifying your portfolio by investing in a mix of different asset classes. If your employer offers a 401(k) or Roth IRA plan, start there. It’s easy to invest with employer-sponsored retirement plans.
Set a budget: Determine how much money you can afford to invest each month and stick to your budget. You may want to consider setting up automatic contributions to your investment accounts to help you stay on track. Most wealthy investors use the power of automation.
Monitor progress: Finally, it's important to regularly monitor your investments to ensure they align with your investment goals and risk tolerance. Rebalancing your portfolio periodically can help you stay on track and avoid taking on too much risk. If you’re unsure how to rebalance, consider hiring a seasoned financial planner to help with the details.
Mistake 2: Chasing Hot Stocks:
Getting caught up in the hype around a hot stock (and especially a cryptocurrency) is easy, but chasing performance can be a dangerous game.
Never forget that all investments contain inherent risk. Stocks that are popular today may not be tomorrow, and chasing returns can lead to buying high and selling low. Instead of chasing the latest and greatest stock, build a diversified portfolio that aligns with your investment plan.
Mistake 3: Ignoring Fees
Fees will kill your investment returns over time, and many investors don’t truly understand how much they pay in investment fees every year.
Investment costs include management fees, transaction fees, and other expenses. While some fees are unavoidable, there are ways to minimize them. Consider investing in low-cost index funds or ETFs, which often have lower fees than actively managed funds. In addition, these passive investment options often outperform actively managed investments.
Mistake 4: Failing To Diversify
Diversification is key to managing risk in your portfolio. The more diversification, the better (within reason – it is possible to over-diversify).
Investing all your money in a single stock or sector can be risky, as a downturn in that particular market can cause your portfolio to suffer. Instead, diversify your portfolio across different asset classes, sectors, and geographic regions to help reduce your overall risk.
For example, suppose you have $200,000 to invest. Instead of investing all $200,000 in one stock, you could diversify your portfolio by allocating $50,000 to stocks, $50,000 to bonds, $25,000 to mutual funds, and $75,000 to real estate investment trusts (REITs).
Mistake 5: Timing The Market
Trying to time the market is a common mistake even experienced investors make. The numbers clearly show that those who time the market don’t make as much money as those who remain in the market for the long haul.
The problem is that it's impossible to predict the future, and attempting to time the market can lead to missed opportunities and costly mistakes. Instead of trying to time the market, build a long-term investment strategy and keep your investments as long as possible.
Mistake 6: Letting Emotions Drive Decision
Emotions can cloud judgment, especially when it comes to investing.
Fear and greed can lead to impulsive decisions that are not aligned with your investment plan. To avoid making emotional decisions, staying disciplined and sticking to your investment plan, even when the market is volatile, is important.
Warren Buffett once said, “Be fearful when others are greedy, and greedy when others are fearful.”
Mistake 7: Not Monitoring Your Portfolio
Investing is not a set-it-and-forget-it activity. It's important to regularly monitor your portfolio to ensure that it's still aligned with your goals and risk tolerance. Rebalancing your portfolio periodically can help you stay on track and avoid taking on too much risk.
For instance, many investors become less risky as they approach retirement age. Rebalancing your portfolio to include less risky investments, such as bonds, might be the right strategy for less risky investors.
This post originally appeared on Wealth of Geeks.
Steve Adcock is an early retiree who writes about mental toughness, financial independence and how to get the most out of your life and career. As a regular contributor to The Ladders, CBS MarketWatch and CNBC, Adcock maintains a rare and exclusive voice as a career expert, consistently offering actionable counseling to thousands of readers who want to level-up their lives, careers, and freedom. Adcock's main areas of coverage include money, personal finance, lifestyle, and digital nomad advice. Steve lives in a 100% off-grid solar home in the middle of the Arizona desert and writes on his own website at SteveAdcock.us.