Beginner Investing Mistakes and How to Avoid Them

Every new investor is bound to make mistakes.

Investing is a great way to build wealth over the long-term, and everyone should be investing. But when you’re just starting out, it’s easy to make mistakes. Here are nine common beginner investing mistakes.

1. Investing Too Early

Investing is almost always a good idea, but if you have no emergency fund and are drowning in credit card debt, you might want to hold off while you gain solid footing. Without cash you can use during hard times, you may end up putting expenses on a credit card, and the high interest rate is enough to reverse whatever gains you’ve made investing. You should ideally have about six months of expenses saved, but just $2,000 could be enough to justify starting your investments.

If you also have no idea what an index fund is, or you want to invest solely because of a meme stock you heard about, you might want to take a step back and educate yourself before dedicating serious money, although there’s little harm in putting small amounts into stocks just to get your feet wet. But at the same time, don’t get the idea that you need to know everything about investing before getting started. Investing is an ongoing learning process.

2. Chasing Past Performance

Repeat after me: Past performance is not indicative of future results. The cardinal sin of investing is judging an investment on how well it’s performed over the past year or other short-term period. This is also known as performance chasing. Take ARK ETFs as an example. Investment manager Cathie Wood gained a cult-like following as her suite of ETFs rose to incredible heights in 2020, with the flagship ARK Innovation ETF (ARKK) returning 152.52% that year. Investors piled into her funds, attracted to her alleged stock-picking abilities. But in 2021, ARKK closed down at -23.36%. Already this year, ARKK has lost more than 17% of its value.

There’s a fear of missing out that investors experience when they see a shiny object. Based on recent performance, one might think large growth stocks are what you should be putting your money into. Or on the flip side, one might see international stocks’ poor performance over the past few years and think it's crazy to be investing in them.

Usually, periods of incredible performance are followed by low or even negative performance. An investment that’s performed well recently may be a good long-term investment, but resist the temptation to judge it by recent performance alone. There’s much more to investing than past performance.

3. Frequent Trading

The academic literature is clear: Trading is hazardous to your wealth. Investors that engage in frequent trading lose more money than those that stick to long-term investments. Traders are typically trying to get rich quickly, and what they’re engaging in is more akin to gambling than investing.

When you invest, you should be investing for the long-term. Moving in and out of positions based on short-term events is myopic at best. Investors often think they know what a stock will do in the short-term when in reality, stocks move randomly, and even professionals are bad at making predictions.

Frequent trading can also lead to a higher tax bill than a simple buy-and-hold strategy if you’re investing outside of a tax-advantaged account.

4. Timing the Market

Many people think they can time the market. They usually can’t. The market goes up more often than it goes down. So if you’re wondering whether you should invest now or wait till the market dips, statistically you’re better off investing now. And if you’re investing for the long-term, as you should be, timing your investments won’t significantly change your outcome anyway.

Most people are going to be dollar cost averaging into the market, or investing small, regular amounts when they get paid every two weeks. But even if you have a large lump sum of money to invest, you’re usually better off investing all at once.

Market timing requires you to be right twice: once when you buy and once again when you sell. Very few investors can get it right, and those that do are most likely lucky. Here’s what usually happens when you try: Just when you think the market can’t go any higher, it does, and then you’ve missed out on those gains. Or just when you think the market can’t go any lower, it drops lower. Don’t try to time the market.

5. Checking Your Investments Too Frequently

Checking your investments too frequently can be tempting, but it can also be dangerous. Seeing your account balances drop on a bad trading day can cause you to panic or create anxiety about your investments. You shouldn’t pay a lot of attention to what’s happening daily, weekly or monthly. Even a year of bad performance isn’t necessarily an indication you should make changes. You can’t judge your investment performance on the basis of a few bad days or a bad year.

If you find yourself checking your accounts every day and it’s causing you anxiety, commit to checking only once a week, or once every two weeks. You may consider only logging on when you invest new money.

That’s not to say you should never look at your investments. It’s still a good idea to check your accounts from time to time to ensure your investment allocation is where you want it or to catch fraudulent activity.

6. Reacting to Headlines

One of the most dangerous things you can do as a brand new investor is to closely follow financial media. Negative headlines permeate financial news. And negative headlines can cause you to make rash decisions, like selling stocks as they’re falling. When you do this, you’re locking in your losses. When stocks are falling, it’s an opportunity to buy them at cheaper prices. If you resist the temptation to act during a falling market and you continue investing regular amounts, you will end up far better off over time.

Every investor should have a plan. It should outline your goals, your desired asset allocation, your risk tolerance and how you will behave in specific circumstances. If you create this plan, known as an investor policy statement, you will be less likely to react in a way that hurts your goals.

Don’t invest with your emotions. Filter out the noise and stick to your plan.

7. Getting Stock Tips From Media

Stocks move randomly. People are generally bad at predicting the performance of stocks. Getting single stock tips from bloggers, social media influencers or financial gurus is a recipe for losing a lot of money. Even worse, on the off chance you do make a lot of money in a short period of time, that could teach you the wrong lesson about how to be a successful investor.

Financial TikTok, or FinTok, has become infamous as a source of bad investing advice. But bad advice is prevalent across all kinds of social media platforms. In the case of Reddit early last year, social media contributed to the irrational exuberance that we’ve become familiar with during this bull market.

The people handing out stock tips online don’t know anything you don’t. They aren’t smarter than the average person who consistently puts their money into index funds over time.

8. Too Much Concentration

Investors should be diversified. You don’t want to be too concentrated in one asset class, like U.S. stocks or large growth stocks. People tend to concentrate too heavily in the assets that have done well lately, but these people often suffer when those assets eventually fall out of favor.

Your portfolio should cover a broad range of U.S. and international stocks. You can accomplish all the diversification you need by investing in a total U.S. market index fund and a total international index fund. If you want to tilt your portfolio toward certain factors, like growth or value, or toward specific industries, make sure you understand the pros and cons of deviating from the market weight.

9. Investing in Things You Don’t Understand

“Invest in what you know” might not be good advice — just because you’re familiar with something doesn’t make it a good investment! — but you certainly shouldn’t invest in things you don’t know.

If you can’t explain the investment to someone else, you probably don’t know enough about it. Index funds shouldn’t be hard to understand. They’re investments that track a specific index, or list of stocks. But if you’re like me, and still can’t explain to someone what a put option is, don’t touch it. Invest in things that you understand and do exactly what they say they’re going to do.

Learn From Your Mistakes

If you’re just getting started with investing, or even if you’ve been investing for a while, you’re bound to make some of these mistakes. When you do, don’t beat yourself up over them. Learn from them and you’ll become a better investor.