Many people consider investing at some point in their lives, in the hope of increasing their capital. However, doing so does not come without risks, which is why smart investors should carefully consider their current financial situation and create a plan in order to avoid several classic mistakes that a lot of amateurs tend to make.
Here, we discuss four common errors that many new investors make and how best to avoid them so that you can go forth and invest with confidence.
1. Investing before you are ready
Those who jump in at the deep-end without determining whether they are in a financially stable position to invest will almost always find themselves in trouble. As such, the first thing any would-be investor should do is to examine their current financial situation, helping them ascertain whether now is the right time, or if they would be better off waiting until they are more financially secure.
You can start by undertaking a personal financial audit, listing all in-going and out-going expenses and determining where you can cut costs on non-essential outlays. Likewise, settling any major debts, or at least getting them to a manageable level, is essential before investing.
Those who start investing before they have paid off large debts may not see enough gains to outweigh their current financial obligations, which only creates additional stress and hassle.
2. Not setting your risk tolerance
By its very nature, investing is risky, and everyone considering entering into any for the first time should be prepared to lose money. The level of risk varies between investments, from high to relatively low, so new investors should establish their risk tolerance from the very beginning. Risk tolerance is the level of risk you, as an investor, are willing to take.
Setting a risk tolerance is extremely important because it helps you narrow down the types of investments you will be open to. If you don’t firmly establish your risk tolerance from the start, you could enter into investments that are too high-level and end up losing much more money than you can handle.
3. Not carrying out enough research
Success in the world of investing normally comes from understanding what causes the market to move and which strategies should be used to capitalise on those movements at that time. As such, those who are starting to invest should carry out a significant amount of research beforehand, as well as creating an initial investment plan, helping you to identify the right investments for you at that specific time. Here, the age-old saying “failure to prepare, prepare to fail”, certainly rings true!
4. Failing to diversify
One of the most obvious mistakes that new investors make is failing to spread their investments, instead opting to place all their eggs into one basket.
By diversifying your investment portfolio, you are helping to protect yourself by spreading the risk across several different investment types. On the whole, this reduces the chances of you losing the bulk of the money you have put in, since different investments tend to move in different directions. This means that if one of your investments takes a short-term nose-dive, then the returns seen from the others can offset the losses.
Final thoughts
Taking the time to carry out your research and avoid the mistakes that beginner investors frequently make means you will be better prepared to invest confidently.
That being said, if you are still feeling a little apprehensive, it might be worthwhile to contact a financial advisor, who can help you understand your current situation, as well as making recommendations and creating an investment plan based on your own financial goals. They can also carry out investment fund research on your behalf and should outline the risks involved in each type of investment that you may be considering.
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