Investing your money for the first time can cause irrational fear in the novice investor. To invest your money effectively, you must avoid these 6 mistakes:
- Wanting to make money as quickly as possible
- Let your emotions guide your actions
- Not knowing what to invest in
- Do not follow market news
- Betting it all on a single investment
- Don’t set goals
Mistake no. 1: investing to make a quick buck
This is the first bias you’ll have to fight against as a new investor.
Forget right away that you have a chance to make a lot of money in a short time. And even less by doing nothing.
Investing money is gambling. Betting is a zero-sum game: you either lose or win, and there are risks involved.
Investing your money means taking risks! And risk is uncertainty. At this level, we can’t tell you if you’re going to make money, so thinking you’ll make money quickly is a fundamental mistake.
You can regularly consult the SEC’s risk assesment to get an idea of the risks involved in your investment.
Condition your mindset now to this reality and rest easy with it: investing your money takes time and guarantees no added value.
In reality, the best investors take their time, their investments are long-term and they are able to withstand (big) downturns in their portfolios. They are confident in their investment strategy and their investments, because in the long term, they know they will be winners.
This error was deliberately placed first, as it is symptomatic of new investors in 2023. In particular, it has been reinforced by the rise of cryptocurrencies having exploded returns and capital for those who have based their investment strategy on them.
Mistake No. 2: Letting your emotions guide your actions
It’s hard to persuade a novice investor of the importance of this mistake.
It may seem obvious, but professional or seasoned investors know just how difficult it is when you’re just starting out to put your thoughts aside.
Investing in the stock market, crypto-currencies, real estate or anything else you like must be neutral and devoid of sentiment. The moment you let emotions guide your decisions, you’ll be acting irrationally.
But on a marketplace, all your decisions had better be as rational as possible if you want to maximize your return, because investing your money in the stock market, real estate or any other investment requires expertise specific to that market.
3 known psychological biases linked to investor emotion: the Dunning-Kruger effect, FOMO & FUD.
The Dunning-Kruger effect: experienced at the very start of a new life as an investor. Also known as the overconfidence bias, this effect is characterized by a feeling of ultimate expertise and simplicity of success, before experiencing its first setbacks and finally progressing little by little.
The Dunning-Kruger effect (source: Wikipedia)
FOMO (Fear Of Missing Out): You panic at the thought of not being able to invest in the new nugget. You’ve been hearing about it for a while, it starts to rise, and you’re suddenly tempted to buy it yourself to take advantage of the sharp increase.
FUD (Fear Uncertainty Doubt): This is the opposite of FOMO: you think you’re going to lose everything if you don’t pull your money out now. This situation often occurs in bear markets, when stocks lose a lot of their capitalization, people panic and valuations get so low that you’re tempted to withdraw your investments to minimize your losses.
These two situations should not drive your decisions. Put all emotion aside and stick to the investment strategy you set out at the outset.
Mistake No. 3: Not knowing what you're investing in
This error ties in with the last error (the bonus error), quoted a little further down in the article.
Individuals start investing in unknown investments, usually following the recommendations of others, in the hope of making a good return.
In this kind of situation, we have no idea of the investment’s potential, and we delegate our trust to the person passing on the information.
It’s crucial to understand the fundamentals of the crypto, real estate or stock you’re starting to invest your money in.
What’s the point? Quite simply to better interpret market movements and related signals.
For example: I’ve decided to invest in gold in 2023.
By asking around, I’m learning more about the fundamentals of gold:
- the rarity that goes with it
- Its function as a trusted currency
- The importance attached to this precious metal by central banks and private individuals in times of crisis.
Here’s one last interesting clue: I now know that my investment in gold is likely to reach its bullish peak during periods of crisis. Keeping it outside crisis periods is still interesting, but it will be less valued, I’m aware of that and I’m comfortable with the idea.
More than just understanding value, it’s actually advisable to invest in projects you believe in: it’s your money! Are you sure it’s worth it? Would you even buy the product/service or promise being sold?
Mistake No. 4: Investing without following market news
This error ties in with error number 3, and underlines the need for good intelligence, to get the right information in the right place.
The value of your investments, whatever they may be, is correlated to the real world. Staying behind your smartphone and consulting your trading app won’t allow you to anticipate and prevent market movements.
Market volatility is a normal function of an efficient market. As an investor, you can’t prevent it (spoiler: it’s impossible), but you can understand it and anticipate it.
To succeed in this perilous exercise, you need to understand the environment in which your investments are evolving.
Is the listed company you’ve bought in a geopolitical hot spot? If so, keep abreast of current events in this part of the world: a decision or announcement of any kind by a country could affect the value of your share on the stock market.
A simpler example that will speak to many investors: you probably have life insurance as your main investment, so keep an eye on the financial health of the insurance company in question if you value your capital, and keep an eye on the financial health of the country in which you have bonds via that same life insurance policy if you value your dollars.
Remember: volatility is not the result of chance, but of multiple causes that can be measured and anticipated.
Discover the advantages and disadvantages of life insurance.
Mistake 5: Investing everything in a single investment
You’ve probably played poker before, and this is what’s known as an all-in: you decide to invest everything in a single decision, in a single moment.
In this case, as in poker, it’s double or nothing. If you’re wrong, you’ll lose everything; if you’re right, it can be extremely profitable.
Deciding to invest all your money in a single stock, in a single real estate investment or in a single life insurance policy is close to an irrational decision: there are so many unknown factors that determine the success of an investment that it’s irrational to bet everything on a single security.
Of course, there are exceptions: the investor who deposited 10,000 dollars of capital in Bitcoin in 2010 is just a billionaire today. Ditto for the person who, in 2001, believed in the rise of Amazon and the explosion in listed tech stocks.
But don’t be fooled: in investing, failures are far more numerous. The only reason you might think there are so many big hits is that people only talk about their successes, never their failures.
Investing to find the best return on investment is not something to be done lightly. Investing is all about risk management, and this risk management cannot be optimal if your portfolio and assets are not diversified, or at least sufficiently diversified to be resilient in the event of market shocks.
Mistake n°6: not setting goals
Any investor experiencing his first bullrun has uttered this phrase hundreds of times in his head: “Do I withdraw my gains?“
This lack of focus in your investment strategy is a fundamental mistake: by sailing blindly you risk succumbing to the notorious FOMO: the fear of missing out on a golden opportunity to make money.
Before each investment and deposit, you need to be clear with yourself about the objective of your investment strategy:
“I invest x dollars at x frequency. At x% return on my initial investment, I withdraw x%. In the event of a drop of x%, I withdraw x% so as not to expose myself too much.”
In investing, you need to be stricter with losses than with gains. Example: a withdrawal in the event of a +15% return on investment must be linked to a withdrawal in the event of a -10% loss. If I invest 100 dollars in a stock and decide to withdraw my gain the day the 100 is worth 115 dollars (+15%), I must also plan to cut my loss to 90 dollars (-10%).
Bonus: investing without doing your own research
A must for any self-respecting investor. One of the worst mistakes you can make is to invest money in a project, a company or a stock you know little or nothing about.
First of all, you look like an idiot to the people around you.
If you can’t explain what Bitcoin is for, or what Tesla or Google are selling when you’ve just invested 2,000 dollars in them, you won’t get any admiring glances.
Beyond the social aspect, the preservation of your portfolio is at stake: if you don’t know the assets in which you invest, you won’t be able to gauge the impact of an announcement or a market movement on these same assets.
From then on, your decisions will be irrational, and you’re beginning to understand this now: an irrational decision never maximizes your return.
Do your own research. Consult several sources of information, cross-check data and opinions.
Questions to ask before investing
- Why is this asset rising?
- What’s the market?
- What problem does this asset solve in the real world?
- Is the person advising me paid by a company?
- What is the state of the adoption curve for this asset?
- Are we in a bull or bear market?
Investing without any notion will only increase your risk of eventual loss, and therefore reduce your income.
Every security in your portfolio should be easy to explain to a 5-year-old. This ensures that you fully understand what you’ve invested in.
All these mistakes are common among investment beginners who have to deal with their unstable emotions in the face of market movements. Remember: gather the right information, be as objective and rational as possible about the returns you’re being promised, and diversify your portfolio. While all this good financial behavior will come with the years, get a head start by learning from the mistakes other investors before you have made with their money.
Passionate about savings and investment topics. I modestly try to offer you simple, sometimes not so simple, solutions to beat inflation.
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- How to buy assets
- Where to keep your money out of the banks?
- How can I invest money that pays off every month?
- Should you keep your life insurance?