Newbie Investing Mistakes and How to Avoid Them

You’re bound to make a few rookie errors when trying out anything for the first time, whether it’s making homemade greek yogurt, growing heirloom tomatoes, or learning to drive. After all, learning is a process, and trial and error is a large part of that painful—yet essential—process.

And when it comes to investing, you might be afraid to take the plunge for a number of reasons. There’s simply so much to get your head around. Plus, you’ve most likely heard horror stories of those who suffered huge losses in stocks simply because they didn’t know what they were doing.

That being said, you shouldn’t let that deter you. After all, investing can be an important and powerful way to grow your money and build wealth.

Here are some common newbie investor mistakes, and how you can avoid them:

Not Being Clued in About Fees

Remember: The less you pay in fees, the more you have to re-invest. Do the research to know exactly what you’re getting into cost-wise. Common investing fees include the expense ratio, which is the fee the fund takes to cover fund manager compensation and other administrative costs, explains Samuel Wieser, CEO of Northman Financial.

You’ll also look at any advisory fees, commission fees, and whether a fund has a load fee and when it’s collected, says Wieser. This fee can be charged when shares in the fund are purchased (font-load fee), gradually over time, or once the shares are sold (back-load fee).

Besides the types of fees, know when you’ll be charged and how. Fees typically come out of your brokerage account. Speaking of costs, you’ll also want to when the fees are quoted, calculated, and applied. I know, it can be quite befuddling. If you have questions, speak to a financial advisor, or reach out to the brokerage or platform, and schedule a one-on-one Q&A sesh.

It’s a lot to consider, but there’s really no need to be deterred by fees. Long gone are the days when you need a couple thousand to even get started. There are now a handful of investing apps that offer a low (or no) minimum to open an account and minimal fees. You can check out micro-investing apps such as Acorns or Stash, which cost $5 to get started and a $1 monthly fee for accounts with under $5,000. Robinhood is a free trading app with no initial deposit or commission fees.

Not Having a Plan

You know full well how investing is to growing your money, but ask yourself why you’re investing in the first place, points out Dwight Dettloff, a CPA and CFP® of Winding Trail Financial. Use an investment calculator to determine how investing will serve your goals. Do you want to investment earnings to put toward a down payment on a home or wedding in a couple of years, your child’s higher education, or perhaps retirement?

“Once you understand how the funds are to be used, every decision around the investments can be framed using the particular goal in mind,” says Dettloff. “For example, investing everything into the stock market when you need the funds in six months is ill-advised. That’s because short-term fluctuations in the market might equate to not having the necessary funds available when the time comes.”

Buying Something Without Doing Your Research 

It’s easy to get caught up in the hype and buy shares of a stock just because it’s the hottest thing at the moment. Or you might invest in a company simply because it’s one of your all-time favorite retailers and you have brand loyalty.

“Even if an investment opportunity seems really cool and feels like it has the potential to take off, be cautious if you know very little about the product or company, the market, and its opportunities for growth,” says Jeffrey Burke, a financial planner and owner of 7th Street Financial.

While Warren Buffet’s strategy of “buying what you know” is sound advice when first starting out, you’ll also want to balance that with doing your homework before making any purchases,  adds Michael Kelley II, CFP®, CLU® of Kelley Financial Planning. This means analyzing a company’s cash flow, economic outlook, and business development.

Be smart about your investments and do your homework on companies through fundamental analysis using key info such as revenues, earnings, profit margins, to gauge a company’s value and future growth, explains Wieser. Research stocks through technical analysis, which is looking for patterns in data to determine trends.

“Using both techniques and staying in tune with the overall market and economic conditions of the world are important,” says Wieser. “If you don’t want to put in the time and effort to educate yourself on how to invest your money wisely, find an advisor who can help.”

Trying to Pick the Next Hot Thing

All of us would love to pick the next Amazon, Apple, Facebook and what have you. The reality? It’s nearly impossible to discover the next stock superstar, explains Dettloff. “In fact, studies show that picking stocks is a losing game,” he says. “Wall Street has a hard time picking the next hot stock, and they’re professionals!”

Rather than chasing unicorns, it’s best to invest in a well-diversified portfolio that’s in sync with your risk tolerance, recommends Detloff. In turn, you’ll likely stay in the market and stick with investing over the long-haul, positioning you for success.

Selling at the First Sign of Loss

If you’re a newbie investor, you most likely aren’t accustomed to seeing your investments lose value. The thing is, the market is cyclical—thus bear and bull markets—and therefore the “down years” are normal and inevitable, points out Rick Vazza, a CFA, CFP® and president of Driven Wealth Management.

“Despite the media’s best efforts in reminding investors about the historical volatility of investing, the first taste of large losses can be hard to stomach for novice and seasoned investors alike,” says Vazza. “Developing a written investment plan will help new investors stick with their strategy through these periods of doubt.”

Such a plan should include what you’re saving for, your investment goals, budget, and time frame. You can also include your risk tolerance and comfort level with uncertainty.

Not Starting Soon Enough

As Dettloff points out, time in the market is your friend. This definitely is at the top of my list of money regrets as an adult. “The more time you give yourself, the greater your odds of meeting your goals,” explains Dettloff. “Waiting too long to save and invest can mean either dramatically changing lifestyle to meet the goal, or having to abandon the goal altogether.”

Because I was overwhelmed with the complexity, vastness, and number of unknowns about investing, I stalled on getting knee-deep with investing in stocks. And because I waited, I wasn’t able to enjoy to fully enjoy the power of compound interest. While my investments still make a return, if I had started earlier they would’ve grown even more.

Not sure where to start? Try your company’s retirement plan, such as 401(k), suggests Dettloff. Or open an IRA and put in, say, 50 bucks a month. If you’re switching jobs, don’t forget to inquire about saving for retirement through your new employer, and rolling over funds from an old account.

Focusing Too Much on Investment Vehicles

One of the biggest mistakes investors might  make is to focus all their energy on investment vehicles or strategies such as hot new mutual funds, ETFs, stocks, market timing, and so forth, explains Ben Brown, a CFP®, EA, and founder and CEO of Entelechy. “Instead, how much you’re actually able to save and invest is far more important than the latest market tips or trends,” says Brown.

So before you get too caught up on all the investment strategies, figure out how much you can reasonably set aside for investing. When I first started out, I squirreled away $100 a month to get started. Plus, I contributed a small percentage to my workplace’s 401(k) plan. While it doesn’t seem like much, it was a way for me to get the ball rolling, and got me more comfortable about investing. And over time, I was able to bump up my contributions and learn more of the ins and out of investing.

By knowing what the most common blunders people make when they start investing, you can avoid them yourself. And in turn, you’ll most likely have a less bumpy experience than jumping head first without being aware of these slip-ups. Ready to roll up your sleeves and get started? Godspeed!