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3 Most common investing mistakes that you can avoid.
Earning money through smart investments is a skill. It requires a precise understanding of how stock market investing works. More importantly, it is also about avoiding the common pitfalls that come with being a beginner to the world of investing. There are a host of investing mistakes one can make, but the following appears to be the most common reasons why beginners mess up at the beginning. These mistakes can be incredibly costly to beginners as they severely impact the quality of one’s long term investments. Here are the three most common investing mistakes to avoid.
1. Using debt instruments for wealth creation
Picking debt instruments as a means for building wealth in the long term is one of the most common investing errors. Money doesn’t grow as quickly when invested in a debt instrument. The comparison between investing in equities versus debt is stark with a significantly higher rate of returns offered by equity. Unfortunately, many act on our savings goals without enacting what is essential for wealth creation, equity investments. Savings are absolutely critical but debt instruments should not be seen as tools to grow wealth.
Instead, they should be viewed as emergency savings. A PPF or FD has the function of locking away funds that can potentially help you during a crisis. However, seasoned investors swear by the investment tip that wealth creation is only possible when one looks at market-linked non-debt instruments as they have the potential to yield major returns in the long term. Stock market investing in equities directly or through mutual funds is critical, as these instruments are wealth creation tools for any investor.
2. Allowing short term changes to interfere with long term investments
The resource of time is the most essential when it comes to growing wealth. Short term changes in market movements can deter a beginner investor as they may hastily make the decision of selling off their potentially lucrative securities. This is a decision based on feeling a sense of panic. An emotional response to these fluctuations in the market could lead to decisions that one would regret once the market is functioning well once again. Dropping out of one’s long term market investments is costly as one may not be recognizing that the volatile nature of the market is a temporary state.
The purpose of a long term investment – whether or not one is partaking in stock market investing – is to harness the power of compounding to your benefit. By letting go of the patience needed to sustain these investments and quitting during a temporary market low, once could be losing out on the opportunity to significantly grow their wealth. It\’s absolutely crucial to not lose sight of why you are investing money and what those investments can do for you in the long term. If one keeps changing their long term financial goals, they will not commit to any of them and lose out on the wealth they could have earned over the years of staying invested.
3. Dipping into retirement savings before retiring
Retirement feels ages away so dipping into your savings may not feel like a huge transgression, but this can be a costly move. The more money one takes out, the more one interrupts and alters their compounding journey. Dipping into savings is justified if you are in a state of a financial emergency and are at a loss of options. However, the purpose of saving your money in an emergency fund is exactly the same.
Hence, instead of using your retirement corpus for emergencies, one of the best investment tips is to start preparing an emergency corpus right this instant. There are many factors that can lead to your retirement corpus not being enough, especially if you have dipped into it before you reach retirement age. Inflation is bound to increase as well as life expectancy, so once retirement savings need to be enough to cover those potential costs. You will, in short, live longer to buy expensive groceries that keep getting costlier. Hence, a retirement corpus is best left untouched.
Ultimately, the goal with any long term investment is to harness the power of compounding, and these investing mistakes interrupt that process. Each of these investing mistakes is very commonly seen in beginner investors. However, they can be easily prevented, and make a big difference to one’s wealth creation when avoided.