Investing can help you grow your wealth. When you buy assets that produce a positive return, you don't have to work for every dollar you have — your existing money can earn more for you. But, you can also end up losing money if you don't make smart choices about your investment strategy.
Unfortunately, many people make mistakes when getting started in investing that end up costing them. The good news is, if you know about these common errors in advance, you can avoid them.
Here are three of them.
1. Investing based on emotion
Decisions about what to invest in should be based on research and reason, not based on your feelings.
If you make decisions about what assets to buy based on fear of missing out on the next investment that captures the attention of social media influencers, you risk big losses. Likewise, if you decide to sell your investments when they start going down because you get upset as you see your portfolio balance fall, you'll end up locking in losses that you might have otherwise recovered from if you'd waited out the downturn.
Emotion should be left out of investing entirely if you want to maximize your chances of success. It's easier to do that if you are confident in your investment strategy and understand how to research the stocks, ETFs, or cryptocurrencies you're buying.
2. Taking bad financial advice
There are plenty of people out there who are eager to provide you with financial advice. But not all of those people have your best interests at heart.
From unscrupulous actors operating Ponzi schemes or executing pump-and-dump schemes to financial advisors who promote products that pay them the most commissions, there are lots of untrustworthy individuals who want to part you from your money.
To make sure you aren't led astray by bad investing advice, listen only to trusted, certified financial or investment advisors with proven credentials. Read reviews carefully, understand their fee structure, and aim to work with fiduciaries whenever possible as they have the strongest legal obligations to put your interests first.
And remember that no one has as much interest in your financial success as you do. So when you get investing advice, it's worth researching on your own to make sure it's sound.
3. Investing with money you'll need soon
Finally, you don't want to put money into the stock market if there's a chance you'll have to use it soon. Otherwise, you could find yourself having to sell at an inopportune time and facing investment losses that could have easily been avoided.
Markets go through cycles. And sometimes even high-quality stocks will see their share prices fall because of temporary problems or economic issues outside of the company's control. The price per share should climb back up if the companies are sound ones, but you may need time for this to happen.
Ideally, you shouldn't invest money you'll need within the next two to five years, since a longer time frame will provide the opportunity for the market to recover if it goes through a downturn shortly after you've bought your assets. And you should define your risk tolerance and set your asset allocation based on how long it will be until you'll need to rely on your invested funds.
By avoiding these three mistakes, you can hopefully set yourself up for investing success by avoiding some of the most common pitfalls that trip up new investors.
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