5 Common Investing Mistakes and How to Avoid Them

The first notable mistake that many investors make is simply not starting soon enough. Although most of us know a finance bro who got lucky on a few stocks that took off, investing is typically not an overnight wealth building operation. For most investors, building significant wealth from investing takes years and more commonly decades. This is why it so important to start as soon as possible.

Lets look at an example to prove this. Say you wanted to save for your retirement in 40 years. We are going to assume that you will make monthly contributions of $200 to your investing portfolio and that you can earn a return of 10%.

When you retire, you will have just over $1 million. However, lets say you waited 10 years to get started. Instead of having over $1 million, you would have just under $400,000. Simply by waiting 10 years, you cost yourself $600,000. This insane difference is due to the power of compound interest.

How to avoid this mistake: Get started as soon as possible. Even if you can't allocate a lot of your income towards investing at the moment, it is always a good idea to build the habit of consistent investing and up the amount of your contributions later on.

Mistake number two is failing to diversify your investments. Simply put, diversification is the idea that you should not put all of your eggs in one basket. Whenever an individual asset skyrockets in value, it is tempting to put a significant percantage of your portfolio in this asset.

Although you do have the possibility of experiencing a higher return, you are also exposing yourself to more risk as you are betting on a single asset doing well. When you diversify, you spread the allocation of your portfolio accross multiple asset classes. This means that even if one of your investments isn't doing well, the other investments within your portfolio can make up for it.

How to avoid this mistake: Diversify your investments. The exact diversification you should have will depend upon your overall investing goals and risk tolerance. One of the easiest ways to make sure you are diversified is to use a robo advisor. A robo advisor will build and manage a diversified portfolio for you based upon your goals and risk tolerance.

The reality of investing is that markets go up and markets go down. It is almost impossible, even for investing pros such as Warren Buffett, to perfectly predict the exact day and time when a stock is going to go up, down, or stay the same. In a perfect world, you would always be able to buy lots of stocks when the price had crashed so it was cheap, and sell those stocks at the top to maximize your profits.

However, this never happens. This is why it is a big mistake to try to time when the market will be up and down. Ever hear the saying, "time in the market beats timing the market." For almost all investors, this statement has proven to be true. The reason being is that the stock market historically returns anywhere from 8% to 12% over a long enough time horizon. Trying to time or beat the market in the short term will end up doing more harm than good.

How to avoid this mistake: It is very simple. Do not try to time the market. Instead you should invest for the long term and anticipate the historical positive return of the overall market. You can learn how to do this by seeing our post on the best investing strategy for new investors.

Investing is easy when everything is going up. Investing becomes much more challenging when everything is coming down. Letting your emotions take over is a very common mistake, especially if you have low risk tolerance. Although there is not a specific action that is assosiated with emotional investing, a few behaviours could include selling all of your investments the moment they lose value, and buying high risk investments when you don't need to.

How to avoid this mistake: Keep a level head. Although this is easier said than done, it is so important. Making rash decisions based upon your emotions can kill your progress. As we have noted a few times already, investing is a long term game. Keep your focus on the big picture. It can help you avoid emotional decisions in the short term when things get choppy.

Investing is a marathon and not a sprint. If you expect your investments to instantly make you wealthy, you are going to be disappointed. Say you invested $1,000 and expect a return of 10%. At the end of a year you would have $1,000.

However, if you left that same $1,000 invested and never touched it again, you would have $45,259. Letting your investments work over a long time horizon can be the difference between reasonable returns and significant growth.

How to avoid this mistake: Have a long term perspective. Although there is no hack for being patient as you invest, it is important to remember that you are investing to build wealth over a long period of time and not trying to quickly time or beat the market.