Investing Mistakes You Need To Avoid!
Business | 28 Nov 2019
“It’s said that a wise person learns from his mistakes. A wiser one learns from others’ mistakes.” John C. Maxwell.
Since we were young, making mistakes was the best way we learnt. Think back to the time when you were learning to cycle. You tried to cycle, you fell, then you picked yourself up and tried again. However, there are some mistakes in life that we should never make, especially when it comes to investing. We want to help every young adult avoid the misstep that will jeopardize their financial goal, so here are five common mistakes that young adults tend to make about investing that you need to avoid!
Procrastination is the act of delaying or postponing something until the point where you are forced to take action. Being busy with work-life, finding time for family and friends and the lack of time to understand investing are some reasons why young adults procrastinate. However, such procrastination can have negative consequences on your financial well-being, especially in the long run. This is because a key essence of investing is the concept of time.
When you have more time for your investments to grow, the more likely your investment will multiply to a sizeable amount. In addition, with more time, you can let the concept of compound interest take effect.
Assuming your investments of $10,000 made 6% annually, the subsequent compounding would be the amount that included the interest. Let’s break that down. In the first year, you would make $600 in interest on the invested amount of $10,000. However, in your second year, you would be making 6% on $10,600, that means you’ll be making $636 in interest in the second year! This cycle will continue and in 20 years, your initial deposit of $10,000 will total to $32,000. That’s tripling your money in 20 years, thanks to the power of compounding interests!
Risking More Money Than You Can Afford
At one end of the spectrum, there are young adults who procrastinate. At the other end of the spectrum, there are young adults who are too eager to invest. These young adults often make the mistake of risking more money than they can afford into investing. Some of them might even use their emergency fund to invest in the hope of growing more money.
However, this can be a fatal mistake. What happens if you have a sudden need for cash? You may end up selling your investments at a loss, especially if it is at an inopportune time. Setting aside an emergency fund (of at least 3-6 months of living expenses) is absolutely crucial when dealing with investments. Only invest money that you can afford to hold in the long term and NOT money that you’ll need in the short term.
Speculating vs Investing
There is a fine line between speculating and investing, especially for young adults who have just started to invest. In speculation, you are predicting that the prices of your investment will go up based on gut feeling. In investing, you forecast the future value of your investment based on fundamentals of the underlying business.
When young adults start investing, they might try to outsmart and time the market in hopes of making more money in the short term. However, this will lead you down the dangerous path of speculating, rather than investing.
Being Too Myopic, Focusing On The Short Term
Investing is not a sprint, but a marathon. However, young adults sometimes make the mistake of treating investing as a sprint rather than a marathon. This results in taking a myopic view towards investing and focusing only on the short term.
For example, when unfavourable news hit, you’ll enter into a panic mode and start selling at a loss to avoid further losses. When the outlook appears more positive, you’ll buy into the investment again. However, this time you bought it at a higher price than you have sold it. In the long run, you will find yourself counting your losses, rather than your gains. That’s why it’s better to hold your investments for a longer time horizon and not let emotions get in the way of your investments if the fundamentals are still positive over the long term.
Thinking Investing Is Only For The Rich
The word ‘investing’ is often associated with the rich. Only the rich have the right and financial capabilities to invest, right? Contrary to that belief, investing is for everyone. Regardless of your financial standing, you can be investing. You can start investing with as little as $100 a month.
Moreover, it is precisely because you aren’t rich that you should start investing. Every young adult has a financial goal that they are working towards. Investing will help you to grow your money to achieve that goal.
Knowledge is a powerful tool to help you achieve a better future for you and your family. Read extensively, be hungry for more and ask questions. So don’t make your own mistakes, learn from the mistakes of others to make the right choice for yourself.
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