When I worked for a discount online brokerage, I saw every different kind of investor. We had everything from multi-million dollar clients on down to 18-year-old kids starting with their first account. Our branch was one of the busier branches in our company, and we saw so many people I could probably write a book on all the characters that I worked with.
This meant that we had many beginner investors coming into our branch. I always enjoyed working with an eager beginner that wanted to create wealth or secure a better retirement with the stock market. Being new at anything can lead to some beginner’s mistakes. This article will help to understand what mistakes to avoid as a newbie in the market.
Read Also: Why I Left the Financial Advisor Industry
Having Unrealistic Expectations
The S&P 500 has returned around 7% annually over the long term. It always confused me then when many new investors were looking for 12-15%. My firm offered a low-cost ETF portfolio and when investors saw 6-8% returns, they balked and thought they could do better themselves.
Be realistic in understanding that investing is a long-term game. Over time you will fall somewhere in the 7% return area. There are no get rich schemes in the market and very few of the smartest investors in the world beat the market all the time.
Buying Penny Stocks
For the love of God, just stop buying penny stocks. So many new clients thought the company they found would be the next Amazon or Tesla. Stop. Penny stocks are extremely speculative, and because they don’t trade on major markets, they have less regulatory rules. A lot of times they are barely companies at all, and the target of pump and dump schemes.
This is basically throwing your money away. Any top hedge fund doesn’t trade in penny stocks, and other big institutional investors aren’t buying them either. New investors need to stay away and focus on big quality companies and index funds.
I was in a few arguments over time with some of our ‘characters’ in our branch. One client called in weekly wondering why his penny stock didn’t pay his 35% dividend. He consistently used outdated information. When I informed him that his company hasn’t paid a dividend in 10 years, he would become irate and demand we send him information on why we were stealing his money.
Not Worrying about Fees
Trading fees and management fees can eat away a large chunk of new investor’s money. If you have $100 to invest and pay $10 each time you buy and sell a stock, you can lose quickly. With small amounts of money, it is almost impossible to trade many times and come out ahead. You need to take a long-term approach and understand how to minimize fees.
Look for a low-cost broker than caters to beginners. There are many new apps that allow users to trade for free! Over time, you can move your account to a bigger brokerage as it grows. Starting out, be aware of the fees of investing and how they impact your return.
Don’t be like our ‘trader bros’ that would walk in with $1000 wanting to day trade. Most of the time they would be back in a few months to cash out their $200, blaming the rigged markets for them losing. They wanted nothing to do with our advice of long-term investing.
Trusting their “friends”
One sweet lady told me her pastor told her about a new stock he invested in so she wanted to buy it. It was very volatile and risky, and when I asked her if she could tell me anything about the company, she said no but if her pastor bought it then it was good enough for her.
I talked with her for a few minutes about this company, the potential for loss, and the risk associated with it. She finally shut me up, and told me to sell $10,000 from her IRA (that she lived on) and buy her this stock. One failed clinical trial later, she had lost over 80% of her investment! She was distraught when she called for an update as she knew this could impact her retirement in a big way.
Stop listening to friends who ‘know a guy’ or have a hot stock tip. Just because they are your friend doesn’t make them any more qualified as an investor. Research every investment decision you make. Never take anyone’s word for it. Even if a financial advisor recommends something, research it and ask questions. It is your money, take care of it.
Buying Complex Investments
Options, futures, commodities, leveraged ETFs, and other complex investments should not be your first investment. Just because there are commercials on CNBC of amazing results, or corn is skyrocketing, doesn’t mean jump in and buy something you aren’t really sure you know about.
If these types of investments interest you, then study them until you understand them, and study them more. A new investor should be focusing on building a solid foundation for their investments. Start with a simple mutual fund or Index Fund, before considering anything else.
Read Also: My 3 Favorite Index ETFs
Not Taking Responsibility
Be responsible for your money. No one else will look after it if you don’t. You will have to take time to understand your investments, learn market basics, and keep up with your portfolio. I had no problem spending hours with new investors wanting to learn and ask questions about the stock market. It was the know it all assholes I couldn’t stand.
We had an investor that bad mouthed our company all over social media because of his mistake. He had a risky stock that was bought out and the terms of the deal said he would receive only cash, not stock in the new company. Our company also charges fees to handle the paperwork and recordkeeping.
He became irate, to the point of us threating to call police to get him to leave, because he was sure we stole his shares and some of his money. In his mind, he thought we just sold his shares because he didn’t know the company was bought. He was also very much in the negative on this stock, losing well over $25,000.
This was all because he didn’t bother to keep up with his portfolio or learn what he invested in. Build a small portfolio of easier investments. Then you can start to branch out if you feel you need to.
Getting started with investing is one of the best ways to create wealth, secure an amazing retirement, and pass on money to loved ones. While the market may seem complicated (it isn’t) and intimidating, don’t let that stop you from starting. Even if/when you make a mistake, learn from it so that you are a better investor because of that mistake. A mistake is only a failure if you fail to learn from it.
If you are new and buy quality investments in great companies, in 10, 20, and 30 years, you will do just find in the market. There is no secret sauce or hidden formula to the stock market. Take some time to learn the basics, seek trusted advice from a professional, and before you know it you will have healthy portfolio that is growing nicely.
Thank you as always for reading! What mistakes did you make when you started? Have you seen any other common mistakes? Comment below!