A lot of people are scared to invest. They worry about losing all their money or making a bad investment decision.
But the truth is, there are only a few mistakes when it comes to investing. And if you can avoid making these six investing mistakes, there's really nothing to fear and you can start building your wealth confidently.
Investing Mistake #1: investing while you have high-interest rate debt
High interest rate debt is anything with an interest rate over 7%. This can include credit card debt, student loans, and your car loans.
It's a mistake to invest while you still have this type of debt, because high-interest debt costs you more than you will make by investing.
In other words, if you invest while you still have debt, you won't make anything from your investments. Instead, all of your earnings (plus some) will be used to pay off your debt. Let me show you what I mean.
Say you owe $10,000 in credit card debt at a 25% interest rate. If you pay that down over 10 years, that's going to cost you $7,415 in interest payments on top of your principal. If you invested that same amount of money, you would only make $3,477 over that same period of time.
Avoiding this investing mistake is simple: use any money you can spare to pay down your high-interest debt.
This may mean sacrificing a bit in the short-term, but the sooner you pay down your debt, the sooner you can start investing and the longer your money has to grow.
Investing Mistake #2: investing in something that you don't understand
I once heard a story about a football player who made millions of dollars and kept it in a savings account.
When he met with a financial advisor, the advisor told him, “At least you didn't invest it in something you didn't understand. That's how people lose money.”
Whether it's a business idea that your friend has, cryptocurrency, or subprime mortgages, unless you understand how it works, don't invest in it. If you want to invest in something, learn how it works first.
Investing Mistake #3: investing in single stocks
Investing in single stocks is what most people tend to think about when they think about investing. They think it means picking stocks, finding that next company that's going to go big.
But picking stocks is risky because the value of one company can go up or down dramatically based on the latest quarterly earnings report. Picking a stock is like putting all your eggs in one basket. It's gambling on that one company that you think is going to do well.
Instead, invest in things like index funds or ETFs, where you can spread your investments out over hundreds of different companies and diversify your investment. The risk that all of those companies go down in value is much lower than the risk that that one company goes down in value.
Of course, I know it's fun to invest in a company that you really believe in, like Zoom at the start of the pandemic or Tesla if you're excited about electric cars. But if you're going to do this, approach it like you would a Vegas poker table. Don't bet more than you're willing to lose.
Investing Mistake #4: pulling your money out when the market goes down
This is one of the biggest –and most common — investing mistakes you can make. Pulling your money out if the market goes down in value is how most people lose their money in the stock market.
When stock prices plummet, people get scared. They don't want to lose more, and so they pull their money out. But the wisest thing to do in that moment is to stay invested. Some people even put more money in when the market is down.
Historically, the market has always recovered. Not only that, but it has continued to rise beyond where it was before, so the best thing you can do is stay invested and give the market time to recover. Our favorite investor, Warren Buffett says, “It's not about timing the market. It's about time in the market.”
You want to stay invested for as long as you possibly can to make the best returns. Think about investing as money that you're putting away for 5+ years, and the longer, the better.
That's why it's crucial to have an emergency fund, so if you need cash for something unexpected, you don't need to pull from your investments.
Investing Mistake #5: not paying attention to fees
Investing fees might seem small, but losing your money to fees over the years, means that less of your money is compounding over time, which costs you in the long run.
Fees can come in many forms — there's a fee that a financial advisor might charge you, the monthly cost of an investing app, and the expense ratio charged on an investment fund — and they range anywhere from a dollar per month to 1% of your assets.
For comparison, put fees in terms of a percentage. For example, let's say you have an app that charges you $1 per month to use it and you have $1,000 invested in it. That means that you're paying $12 per year to invest a thousand dollars. It ends up being a 1.2% fee, and in general, you want to avoid paying more than 0.3% in fees across all, any of your investments.
So, do the math and look for ways to invest that won't charge you more than 0.3%.
Investing Mistake #6: waiting to start investing
I saved the best for last. This is the most costly investing mistake that people make.
There are plenty of reasons why people wait to invest. They're scared of losing their money. They don't know how to invest. They're worried the market is at an all-time high.
These are all super common reasons, and it leads to the unfortunate fact that women tend to invest later and less often than men. But the bottom line is that your investments need time to grow.
Time is the most important factor in the compound growth formula, and the more time you're invested, the more your money will grow. So, follow our five-step roadmap to build wealth: pay off that high-interest rate debt, build up your emergency fund, and then start investing as soon as you possibly can.
If you're ready to start investing and you just don't know where to start, checking out our free masterclass, “Think Like an Investor“!