Mistakes to Avoid As a New Investor

Written by Karen Bryan

Investing is something that many people partake in at some point, usually with the aim of increasing their capital, but sometimes as a new hobby. Starting out as an amateur investor is exciting, but it certainly does not come without its risks, which means every newbie should assess their current financial situation, create an investment plan and carry out lots of research beforehand.

Here, we discuss the common mistakes that many new investors make and how you can avoid them.

Investing before the time is right

This is perhaps the most common mistake that beginner investors make and almost always lands people in hot water. Investing before you are in a good financial position to do so is extremely risky and could mean you lose far more than you can afford to.

As such, sensible would-be investors will first assess their finances, including a full financial audit that outlines all ingoing and outgoing expenses. This will help them decide if there are any places where they can cut costs or make savings. Before investing, all major debts should be paid off, or at least be at a manageable level.

Carrying out such an audit allows us to decide whether now is the right time to invest, or if waiting is the more sensible option. If there is a significant amount of outstanding debt to pay off, then our financial obligations will simply outweigh any expected gains from our investments.

No risk tolerance is established

Investing is, of course, risky by nature, which is why everybody who is entering the sphere should be prepared to lose money. Risk will vary depending on the investment in question, with some carrying a high level of risk, and others being quite low-risk. This is where risk tolerance comes into play.

Risk tolerance refers to the level of risk that each investor is willing to take, so it is important to establish your risk tolerance from the very start. Setting one will help an investor determine the types of investment they are open to, so as to avoid entering into any that are too advanced, and ending up biting off more than they can chew!

Not enough research is carried out

Investing success often comes from gaining an understanding as to what is causing the market movements and which strategies should be adopted in order to capitalise on them at that particular time. That being said, smart investors tend to carry out a lot of research before they enter into anything. This includes creating a thorough investment plan, which helps people identify which investments are right for them at that time.

Not diversifying

When it comes to investing, the importance of portfolio diversification cannot be stressed enough. Many new investors make the mistake of putting all of their eggs into just one basket – so to speak – which is very risky.

Diversifying protects people, because it allows them to spread the risk across various different types of investment, reducing the chances of losing a large sum of money, as different investments ordinarily move in different directions.

As such, if one investment takes a turn for the worst, you may hopefully still see positive returns from other investments within your portfolio, helping to offset the losses.

Closing thoughts

Carrying out thorough research and planning ahead allows new investors to avoid the common mistakes faced by others, allowing them to invest with confidence.

If you are considering entering into the investing world, but still feel slightly apprehensive, it could be beneficial to work alongside a financial advisor, who is there to assist you and make sensible recommendations, including creating your investment plan and setting financial goals. Financial advisors are also able to recommend investments to you, such as the best income fund for 2019, as well as outlining the risks and potential gains for each type of investment.