If you want to create wealth, investing is one of the best ways to make it happen, besides winning the lottery or inheriting a fortune, of course. No matter if you’re saving for a luxury retirement, ivy league education expenses, or to pass money to the next generation, investing consistently over time is a wise strategy.
Problem is, investing can be intimidating, and no one wants to lose money, right? Many people never get started, or they have big misconceptions about what good investing really is.
I interviewed Chris Hill from The Motley Fool to chat about common mistakes that new and seasoned investors should avoid. If you haven’t already heard of The Motley Fool, it’s a multimedia financial services company that’s been providing advice for investors since 1993. Chris oversees business strategies and a lot of audio programming at The Motley Fool. He’s the terrific host and friendly voice behind two wildly popular podcasts: Motley Fool Money and MarketFoolery.
Motley Fool Money airs every week on more than 50 radio stations across the United States. It is consistently ranked as a top business and investing show on Apple Podcasts and other podcast sites. Chris interviewed me for the February 28, 2019 episode of the MarketFoolery podcast, which is another top-ranked daily show.
On the Money Girl podcast, Chris and I discuss his background, answers to common questions from his audience, and a variety of investing topics, including:
- Overcoming barriers to getting started with investing and why it’s easier than you may think
- The best account to begin investing with and how to make it automatic
- The only investment fund you may ever need
- Big misconceptions about investing that you should avoid
- How your temperament plays a role in investing success
- Why holding too much cash can be dangerous in the long run
- The “sleep factor” for an investment
- The pros and cons of the robo-investing trend
Common Investing Pitfalls to Avoid
These are common mistakes many people make when considering what to do about investing.
1. Doing nothing.
There is no guarantee that the market will go up the first day, month, or even year that you invest in it. But there is one guarantee: Doing nothing at all will not provide for a comfortable retirement.
2. Starting late.
Postponing your investing career is second only to not investing at all on the list of investment sins. You already know that the earlier you start the better off you are.
If you’re already past those formative twenties (you don’t look a day over 32 to us), we’ll reword this first pitfall to read: “Not starting now.”
3. Investing before paying down credit card debt.
If you have money in your savings account and you have revolving debt on your credit card, pay it off. Many credit cards have an annual interest rate of 15% or more.
Let’s say you have $5,000 to invest, but you also have $5,000 debt on your credit cards with an average annual interest rate of 18%. It doesn’t take an astrophysicist to figure out that you’re going to have to get an 18% return after you pay taxes just to break even on that $5,000. Pay the debt off first, then think about investing.
4. Investing for the short term.
Only invest money for the short term that you’re actually going to need in the short term. Invest money in the stock market that you won’t need for at least three years, and preferably five years or longer.
If you’ll need your cash next year for a down payment on a house or for the family Caribbean cruise, use one of the shorter-term and safer havens for your cash, such as money market funds or CDs.
5. Turning down free money.
You’d never turn down a dollar if it was offered with no strings attached. That’s what you’re doing if your company offers a 401(k) or similar retirement savings plan with an employer match and you’re not participating. Take advantage of all tax-advantaged, employer-matched savings programs.
6. Playing it safe.
If you’re young, most of your investing dollars should be in the stock market. You have enough time to weather any dips in the market and to reap the rewards of long-term gains. Although you may want to transition into bonds later in life as you depend on your investments for income, stocks should make up a large portion of the portfolio of every investor.
7. Playing it scary.
Not every investment is for everyone. Even if you’re a daredevil, you shouldn’t pour all of your money into something that could end up going down the drain.
8. Viewing collectibles or lottery tickets as investments.
If old comic books, Barbie dolls, and abandoned exercise equipment could be used to fund retirements, do you think the stock market would exist? Probably not. Don’t make the mistake of thinking your jewelry, those Beanie Babies, or the lottery will provide for you in your latter years.
9. Trading in and out of the market.
We believe the best approach to investing is the long-term one. Pick your investments well and you’ll reap greater rewards over the long term than you had ever dreamed possible.
Trade in and out of the market and you’ll be saddled with fees that chip away at your returns, and you’ll potentially miss out on gains that long-term investors enjoy with much less effort.