4 Things Investors Should Never Do
- Author: Michael Bordonada
- Posted: 2024-06-11
Like many, you are probably trying to grow your wealth with investing strategies. When done properly, investing is one of the best things that you can do for your personal finance situation. However, investing is also a double-edged sword. When you make mistakes, you can set yourself back years and fritter away the money that you would need for an emergency or for retirement. Therefore, as a new investor, it is critical to avoid rookie errors that can be costly. Here are four mistakes that new investors make that you should not.
Do Not Invest Your Emergency Money
When you make an investment, one of the first things that you need to realize is that your investment can go sour. Even the savviest financial move can run up against market headwinds and put you in the red. If you are using the money that you absolutely need, you will end up in trouble and having to borrow if you hit a financial pothole.
The money you invest should be the extra money that you have specifically earmarked for the purpose after you have already filled your emergency fund. This will not put you in any jeopardy of defaulting on your debt or being evicted if your investment does not pan out the way that you want. When you invest the money that you sorely need, you are more likely to panic and prematurely sell when the right thing to do is to ride out the investment.
Do Not Invest for the Short Term
When you are trying to turn a quick profit, you are not an investor. Instead, you are a trader who is trying to play short-term market moves. Trading and investing are two fundamentally different things. We mean no disrespect when we say that the average person is not a very good trader. It is simply not possible to excel from your living room and mobile device when professionals have the edge on you.
When your horizon is long term, you are able to be more patient and ride out some of the bumps in the road. In other words, you panic less. When you invest, you need to think years into the future as opposed to months and weeks. You are trying to steadily grow your portfolio and assets because adopting a get rich quick mentality will make you poor in short order.
Knowing Nothing About Your Investments
Some people will buy based on a ticker symbol because they think that the stock price will go up fast. Again, that makes you a trader instead of an investor. It is essential that you understand what you are investing in and why you are putting your money there. When people do not have any idea of what they are investing in, their emotions take over as opposed to rational thoughts. In other words, they are more prone to do dumb things with their hard-earned money. Before investing, people need to thoroughly study what they are buying and have a reason for the investment. Some securities are simply too complicated for the average investor. This is where the professionals end up taking advantage of the Main Street investors. When it comes to investing, simple can be better than complex, especially when you have the right long-term horizon.
Do Not Buy on Margin
Your broker is more than happy to lend you money to buy securities on margin. They make money because they charge you much more than they are paying for the capital. No matter the rate, buying on margin is a bad idea. If the average investment pays you 8% per year, you are barely breaking even when you are paying at least 7% or more as a margin interest rate. Not only can you magnify your losses in a hurry, but margin investing is more like gambling and encourages risky behavior. In order to make more than the interest rate, you will need to take chances to earn a higher rate of return. This type of mentality is dangerous. While margin interest is tax-deductible, that only cuts your rate by your marginal income tax rate. More often than not, investors who use margin to buy securities end up in the red.
When it comes to investing, you would rather be good than lucky. You should not put yourself in a position where you are taking needless risks. If this is the case, you are better off not investing at all.
