15 Common Investing Mistakes & How to Avoid Them

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When it comes to investing, there is a lot of noise out there. From CNBC pundits to countless “hot stock tips” floating around the internet, it’s hard to know what you should be doing. However, while there are many paths to successful investing, there are some mistakes you’ll want to avoid no matter how you invest. Today, I’m sharing the 15 most common investing mistakes and how to avoid them so you can learn to build more wealth.  So, without further ado, let’s get into our first investing mistake. 

1. Waiting to Start Investing

First, the biggest investing mistake people make is not investing at all. Perhaps they feel like they can’t afford to invest. Or maybe they’re not sure where to start. While these are valid concerns, here’s the truth. 

You can’t afford not to invest. If you have ambitions to have freedom from work someday, you need to start investing. Additionally, far too often, people wait until they feel they have more money to invest. This, too, is a mistake.

Why? Because compound interest principles tell us that the longer your money has to grow, the more times your money will multiply.  

Avoiding this Common Investing Mistake:  Start Investing Now

No matter what you can afford to invest, the secret is just to get started. Whether you can invest $5, $50, or $500 per week, the most important thing is to begin. Set up an investment account and start investing your dollars as soon as possible. 

If you already have a 401(k) at work, great, use it! Otherwise, set up an IRA with a brokerage like M1 Finance and automate investment contributions into this account. If you’re not sure how to invest, M1 will even help you build your portfolio based on your investment goals.

Now, what if you’re looking for an even easier solution to start investing just a few dollars? Start small with a spare change investing app like Acorns. You won’t even miss the money you’re investing, and it can help you get in the habit of putting your money to work. Over time, these small investments will add up.

Common Investing Mistakes Pinterest Pin

2. Not Investing Enough

If you’re already investing, that’s great! But are you investing enough? Unfortunately, this, too, is a common investing mistake.

I often hear folks tell me they’re investing 3% in their 401(k) to earn the company match. While I am glad to hear this, the truth is, this isn’t enough.

Most people should aim to invest 15-20% of their income in a diversified investment portfolio. While the formula will vary depending on how old you are, this is a good starting place.

Avoiding this Common Investing Mistake:  Boost Your Contributions Regularly

If you think that 15-20% is an impossible target, I challenge you to increase your contributions by 1% each year. Or, if you’re feeling ambitious, try increasing your contributions by 1% per quarter.

Increasing your investment contributions by 1% is such a small amount that you won’t even miss the difference. And, once the money is “gone,” it goes to work for you instead of being available for spending. 

3. Investing Money You Can’t Afford to Lose

Alongside investing too little, it’s also possible to invest too much. What do I mean? I mean investing money you can’t afford to lose.

Here’s the problem. If you invest money in the market, retrieving it can be challenging. Let’s talk about a couple of scenarios. 

First, assume you need to withdraw cash from the market. If the market has done well, that’s a good thing, but you’ll pay capital gains tax when you sell stocks/bonds to withdraw cash. Paying taxes on investment returns now can hamper your investment returns over the long run.

Now, what about the opposite? If you have an emergency and need to raise cash, what happens if the market has done poorly? In this situation, you now have to sell stocks when they’re down, and this is just about the worst thing you can do. And, chances are, if you have a financial emergency, it’s at precisely the same time as when the market is in a downcycle. 

Avoiding this Common Investing Mistake:  Only Invest What You Can Afford to Lose

Here are a few tips to avoid this common investing mistake. 

First, always pay off high-interest rate debt (e.g., credit cards) before investing. You will never out-earn a 20% interest rate by investing before paying off expensive debt. 

Second, fund an emergency fund before you choose to invest. Your emergency fund is your fallback if things go sideways, helping you avoid drawing on investments if things take a turn for the worse.

Finally, any money you need in the relatively near-term (five years or less) should not be invested in the stock market. For example, if you’re saving up to pay for a wedding that you expect to happen in the next couple of years, this money should not be invested. The only exception I make to this rule is suggesting using Series I savings bonds for some of your emergency fund because your principal is never at risk. 

4. Attempting to Time the Market

Are you wondering about the most common mistake made by investors? It’s probably attempting to time the market. If I had a dollar for every time someone tried to time the market, well, I’d be retired. Trying to time the market is impossible. 

Let’s take a recent example. Remember the GameStop frenzy? The stock started 2021 at around $17 per share. After Reddit users pushed the stock through the roof, it rose to $483. By early February, the stock was back down to about $51 per share. 

Somebody bought GameStop at $483. And they got crushed. Why? Because they tried to time the market.

Avoiding this Common Investing Mistake:  Buy and Hold

The easiest way to avoid getting caught up in the frenzy of a rising share price is to buy consistently and hold on to your investments. Don’t buy when the market goes up. Don’t sell when the market goes down. It is that easy. 

Use a strategy called dollar-cost averaging, where you purchase shares at consistent intervals. You’ll naturally buy some shares at lower prices and some shares at higher prices. And that’s okay. Winners in the stock market don’t try to pick their entries and exits. They invest over and over and over. 

5. Trying to Pick Winners

If trying to time the market is one of the most common investing mistakes, then trying to pick winners is undoubtedly one of the worst investing mistakes you can make.

The Wolf of Wall Street had one line that adequately sums up stock-picking:

“I don’t care if you’re Warren Buffett or if you’re Jimmy Buffett. Nobody knows if a stock is going to go up, down, sideways, or in circles.”

Perhaps you’re wondering, then, why there is an entire industry dedicated to stock-picking (including mutual funds, financial advisors, etc.). The truth is that some people think they “add value” by picking stocks. But history has proven time and again that no one can accurately pick winning stocks over the long run. 

Avoiding this Common Investing Mistake:  Invest in Passively Managed Index Funds

If you want to be a long-term investor, rather than trying to pick the stocks that will perform best, buy the whole market. To do this, seek out index funds that contain a large swath of stocks. 

You’ll own some winners. You’ll own some losers. But over the long run, your performance will be no worse than the market as a whole. And over long periods, the market as a whole has proven to be a winner.

6. Failing to Diversify

Alongside stock-picking, one area where people tend to get into trouble is failing to diversify. When you put all your eggs in one basket, you’re bound to have more portfolio volatility.

A portfolio of five stocks is not diversified. In fact, according to modern portfolio theory, you’ll want to have at least 20 or so stocks in your portfolio to reduce volatility. 

Avoiding this Common Investing Mistake:  Use Broad-Based Index Funds

Rather than selecting a handful of stocks for your portfolio (i.e., stock-picking), buy indices that hold large numbers of stocks (such as an S&P 500 index). This will help you diversify.

Additionally, diversify across asset classes to minimize portfolio volatility and increase risk-adjusted returns. This means having a portfolio of stocks and bonds (at a minimum) and potentially adding other classes like real estate. 

7. Taking the Wrong Amount of Risk

When building your portfolio, you’ll need to choose an asset allocation. For example, maybe you want a portfolio of 80% stocks and 20% bonds. 

However, when determining this allocation, you need to consider your risk profile. If you’re approaching retirement age, for example, you don’t want to be as invested in riskier asset classes like stocks. Or, if you’re in your 20s, a portfolio that primarily consists of bonds will not help you reach your investing goals.

However, while your age is one consideration, also consider your risk tolerance. If you think you’ll be spooked into selling when the stock market drops 30%, make sure you don’t weight your portfolio too heavily towards stocks. You’ll sell when the market falls, doing more harm than good. 

Avoiding this Common Investing Mistake:  Know Your Risk Tolerance

Get a sense of what percentage of your portfolio should be in each asset class, using your age as a guide. However, also consider your risk tolerance before determining your portfolio allocation.

Risk Letters

8. Not Understanding What You’re Investing In

This next common investing mistake is about understanding the asset classes to which you direct your investment dollars.

Take cryptocurrency, for example. While everyone has jumped on the bandwagon, if you don’t understand how it works, don’t buy it just because you think it has an attractive return profile. You will eventually get burned.

Avoiding this Common Investing Mistake:  Buy What You Know

If you want to keep things simple, stick with broad baskets of stocks and bonds. 

And if you want to move into a new asset class, get educated first. 

Take real estate, for example. A year ago, I didn’t know anything about real estate, but after reading nearly a dozen books on the topic and listening to countless podcasts, I felt confident that I had wrapped my head around the basics. Only once I understood the asset class did I invest. 

9. Excessive Trading

This next one is a common beginner investment mistake. Many new investors will shuffle in and out of assets left and right.

Perhaps they expect astronomical returns, or maybe they simply lack the patience to wait for their investment to grow. 

Unfortunately, this is a losing strategy. Who gets rich when you trade in and out of stocks? Your broker. They collect fees and commissions every time you buy and sell assets.

Avoiding this Common Investing Mistake:  Buy and Hold

By now, perhaps you’re noticing a theme. Buy broad, low-cost index funds, and then hold them. This strategy will help keep your trading costs down and avoid the temptation of trying to pick winners.

10. Letting Emotions Make Decisions

One of the biggest investing mistakes you can make is letting your emotions make decisions for you. Emotions related to investing typically take shape in two forms:  selling when the market is down or buying when the market is up.

The former is the more common. People panic when they see their portfolio balance decline and then sell out of fear. Selling in a down market is the worst thing you can do. Chances are, if you sell, you might miss out on some of the market’s best days. 

Imagine you invested $10,000 in an S&P 500 index on January 3rd, 2000. If you stayed fully invested from then to December 31, 2019, you would have earned an annualized return of 6.06% (according to JP Morgan). Now, imagine that you missed the best ten days in the stock market over this period. What would your return have been? 2.44%. 

Let that sink in. If you missed the ten best days out of 7,302 days (counting weekends, holidays, etc.), your return would have been cut by more than half.

What’s more? Six of the best ten days occurred within two weeks of the ten worst days. The point is that not only can you not time the market, but you must remain fully-invested when the market drops, regardless of what your emotions tell you. 

Avoiding this Common Investing Mistake:  Buy, Buy, Buy

Do not sell when the market goes down. Instead, continue on a steady path of dollar-cost averaging, buying more shares when stocks get less expensive. 

11. Paying Fees

Fees

This next mistake is the one that drives me insane. Let’s assume you own a mutual fund that averages a 7% return. If that mutual fund charges 1%, it seems like no big deal, right?

Let me say it differently. In this example, the mutual fund fees are eating 14% of your returns. Sounds like a bigger deal now, right? 

Couple high fees with actively managed funds with a history of underperforming, and your portfolio is really in trouble.

Investment fees are one of the biggest detriments to your portfolio, and you should avoid them like the plague. 

Avoiding this Common Investing Mistake:  Buy Passively Managed Funds

Rather than purchasing actively-managed funds that are bound to fail over a long period, seek out passively-managed index funds. They are typically much lower cost and can help you match the market’s returns without fees eating into your gains.

Are you wondering what you’re paying in fees now? Check out Personal Capital, the tool I use to track my portfolio. Personal Capital has a retirement fee analyzer, which can help you understand how much you will lose to fees over an investing lifetime.

Personal Capital

Personal Capital is a comprehensive suite of financial tools that helps you track your net worth, make sure you stay on track for retirement, and much more! The best part about Personal Capital is it offers a FREE way to track your investment and cash accounts and plan your financial future! Check out this review to learn more!

12. Not Considering Tax Implications

This next common investing mistake revolves around taxes. When people have investment gains, they often want to take money off the table. While this can make sense if you’re rebalancing your portfolio, make sure to consider the tax implications.

If you’ve held the asset for less than a year, you’ll pay ordinary income tax on any gains on the sale. If you’ve owned the asset for more than a year, you’ll pay long-term capital gains taxes, which are substantially lower.

Before selling any stock, consult your financial professional to understand the tax implications. 

Avoiding this Common Investing Mistake:  Use Tax-Advantaged Accounts

The easiest way to avoid tax consequences on trades is to use tax-advantaged accounts. I recommend maxing out your 401(k) and IRA before investing in any type of taxable account.

You’ll receive tax benefits for doing so, and you won’t need to worry about the tax consequences of selling shares. 

13. Forgetting about Inflation

This next mistake is all about inflation. If you earn a 7% return on your investment, did you really earn a 7% return?

No. You earned a 7% nominal return less inflation. If inflation was 2%, for example, your real return was 5% (7% less 2%).

Inflation is the reason you must invest. If you don’t, inflation will reduce the value of your portfolio over time.

For this same reason, I recommend not having an emergency fund that’s too large. Any money you have in cash is losing value over time due to inflation.

Avoiding this Common Investing Mistake:  Choose the Right Asset Allocation & Optimize Cash

Choose a portfolio allocation that matches your investment goals and helps keep your money ahead of inflation. 

When it comes to your emergency fund, keep six or so months in cash, but if you have much more than that, get your money invested, so your money doesn’t decline in real dollars due to inflation. 

Damaged Piggy Bank

14. Thinking that Past Performance = Future Performance

If you’re choosing a mutual fund or ETF, you might look at the fund’s historical performance.

Here’s the problem. Past performance is no guarantee of future performance. While many funds may perform well in the short-term, countless articles have been written that show the vast majority of funds don’t outperform over the long run (90%+ fail to beat the market). 

Avoiding this Common Investing Mistake:  Invest Passively

Again, invest your money using passive index fund strategies. Don’t try to pick outperforming funds. That outperformance won’t last. Instead, buy the market and be happy with the market return.

15. Learning from the Wrong Places

Investing is equal parts art and science. While we know what history tells us, it’s impossible to know what the future holds for our investments.

That said, when you’re learning to invest, there is a lot of noise from people who have the utmost convictions in their investment strategies or “stock pick of the day.”

However, following the pundits is a surefire way to have lackluster portfolio performance.

Avoiding this Common Investing Mistake:  Learn from History Instead

Rather than listening to the “hot tips,” learn about investing strategies that have stood the test of time.

The best place to do this is through books. Check out my favorite personal finance books and learn from decades of experience and history. You’ll learn about things like why index investing works as well as why some purported strategies fail. 

15 Common Investing Mistakes:  A Summary

While there are countless common investing mistakes, I have shared those that I think are the most dangerous. To recap, here are the investing makes you should seek to avoid. 

  1. Waiting to Start Investing
  2. Not Investing Enough
  3. Investing Money You Can’t Afford to Lose
  4. Attempting to Time the Market
  5. Trying to Pick Winners
  6. Failing to Diversify
  7. Taking the Wrong Amount of Risk
  8. Not Understanding What You’re Investing In
  9. Excessive Trading
  10. Letting Emotions Make Decisions
  11. Paying Fees
  12. Not Considering Tax Implications
  13. Forgetting about Inflation
  14. Thinking that Past Performance = Future Performance
  15. Learning from the Wrong Places

If you can learn to avoid these mistakes, you’re bound to have a long, successful investing career. Start by learning about the best ways to invest from books that have stood the test of time, and use personal finance tools like Personal Capital to watch your wealth grow.  

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