Investing is a highly rewarding method of building and growing your wealth. However, it’s risky. And if you’re not financially literate, you could lose money entirely without having the chance to get it back.
You’ve probably read all kinds of advice about how to make smart investments and grow your wealth, but here’s something that might be more useful to you: what not to do.
Avoid These Most Common Bad Investment Habits
1. Not Saving Enough Money First
Don’t be tempted to throw your first few thousand dollars into investments. Even if you’ve chosen top-performing stocks or portfolios, what’s the point if you have no savings to fall back on in an emergency?
The 2015 Retirement Confidence Survey shows that 53 percent of American workers have less than $25,000 saved while 35 percent have less than $1,000 saved. Making smart financial decisions isn’t just about building good credit or making your money grow; it’s about making sure your day-to-day life is taken care of first.
2. Forging Emotional Attachments
It’s easy to get attached when you start investing in the stock market. As you do your research and make choices on the companies you think are worth investing in, you’ll no doubt get your hopes up and find yourself rooting for each business to succeed. That’s dangerous thinking because it will give you the urge to stick with them even when it’s time to move on.
3. Putting Most of Your Funds in One Company or Type of Investment
Don’t pick favorites! No matter how good the prospect looks, if the company goes under, or the type of financial product you purchased fails, you’ll lose nearly everything.
Spread your investment funds around to give them the best chance of success. For example, if you had invested most of your money in stocks in 2008 and 2009, you’d have been devastated when stock prices dropped 57 percent.
4. Overlooking Management Fees
Forty-six percent of people mistakenly believe that they are not paying any advisory or management fees in their retirement accounts. If you invest with any sort of financial group or investment team, you will be charged. Check out your options before committing to any management company.
5. Investing Instead of Paying Your Mortgage
It might seem like a good idea to take advantage of low-interest rates and hang onto your mortgage while investing in high-return options, but it’s not. Those other investments won’t pay off for a long time while the rate on your mortgage will fluctuate. If you run the numbers, you’re better off saving yourself thousands in interest by paying off your mortgage as soon as you can.
6. Thinking of Your Home as Your Primary Investment
Historically speaking, your home is not the best investment you could make for your financial future. It’s a great investment when it comes to making a home, but not growing your money.
Look at the facts: Between 1890 and 1990, house prices rose an average of 0.21 percent per year. If you bought a home during this period and were hoping to see it double in value, you’d have to wait about 343 years. Does that sound reasonable? Definitely not.
7. Following a Trend
Just like fashion and food, investments can follow trends. And like most trends, they will wind down eventually. For example, take a look at the alpaca farming trend that began in the 2000s. The Alpaca Owners and Breeders Association began marketing the ownership of alpacas as a fun retirement option, which led to a huge boost in sales of the animal, but not their fleece.
The business plan of investors changed to focus on breeding and selling alpaca calves, which worked for a few years until the bubble burst in about 2014. Afterwards, farmers had to liquidate their “stock” which led to some horrible cases of neglect, not to mention lost investments.
8. Looking at the Short Term
Investing is not about gambling your money on a venture that seems to be paying off in the last week or month. It’s about placing your money into carefully-researched markets with the highest probability of paying off.
Research Your Investments Carefully
Not only do you need to do your own research when it comes to investing your money, but you need to speak with the experts as well. If you don’t educate yourself about how to manage your investments properly and make good financial decisions, you’ll end up losing everything you’ve worked so hard for.
Smart investing is the key to a balanced portfolio, and it will help you avoid frustration and disappointment. Breaking bad habits is not easy, but if you keep a good investment mindset, you’re sure to see the rewards down the road.