24 Sep Common Mistakes Made by Young Investors
Mistakes are a daily part of life. Every one of us make mistakes, but the most important thing is what we learn from our mistakes. It is not uncommon for the young investors to make mistakes, but when you are dealing with money, mistakes with investing can have serious consequences.
However, the good news is that if you start young, you will generally have more timeframe and flexibility to take on risks and recover the losses you have made. It is important that young investors understand the common mistakes made by many and learn how to avoid them to increase the chances of success while investing in the share market.
It is highly advisable that when you are convinced about a good investment idea after doing your research, you should immediately act on it. Markets move quickly and simply thinking about it would not help. In fact, if you contemplate too long, you put yourself in to riskier territory.
Young investors can be prone to not acting on a good idea out of fear or inexperience but missing out on a good idea can lead a young investor to two very bad scenarios. Once you see that the investment that you thought was good going upwards, you will jump in to it at a higher price level as you do not want to miss out on the opportunity anymore. This may result in buying something at a price which is no longer rational and the returns may be not as expected initially. Otherwise, you may find your own rationalisation without thorough research and end up buying shares of similar companies which may not be as promising as your original investment option.
One of the most important aspect of investing is not to speculate. Speculating is equivalent to gambling, as the speculator does not necessarily have a reason for a purchase except that there is a chance that it may go up in value. There have been many dishonest scams in the past where inexperienced investors have lost their life savings by putting their money without proper research and understanding. Instead of speculating and gambling, a young investor should look to invest in companies that have higher risk but greater upside potential over the long term. Young investors in early to late 20’s should consider building portfolio of small to medium cap stocks which have higher growth potential. The biggest risk from speculation is that it may lead to such a big loss that it will put you off from investing for a long period of time.
Another mistake that young investors make is taking on debt to invest in stock market. It is not advisable that you use debt leverage to invest. Always keep aside money to savings and then use a portion of your disposable income to invest in assets that you prefer.
One of the most important factors in forming investment decisions is asking why. If an asset is trading at half of an investor’s perceived value, there is a reason and it is the investor’s responsibility to find it.
Not Investing is not an option, but it is a choice that you should never make as the best time to start thinking about your future is right now. Investors who start early have the longer time frame to recover from losses, gain higher tolerance of risks and become more experienced over time. Spending money now instead of saving and investing can create bad habits and contribute to a lack of savings and retirement funds. Young investors should take advantage of their age and their increased ability to take on risk. Applying investing fundamentals early can help lead to a bigger portfolio later in life.