Beginning investors, in stocks and bonds in particular, tend to make a number of rookie mistakes that cost them money and expose them to needless risk of some financial disaster. Beginners face many opportunities to overestimate the possible returns and underestimate the risks.
Chase the Hot Tip:
Friends mean well but they usually don’t know anything about analyzing stocks. The Web offers an almost effortless way to present dubious “penny stock” investment opportunities and hot new tech stocks. Going for those investments is a bad idea for two reasons: diversity is important, research is important.
The same principles hold for any investment opportunity. A great opportunity to invest in a distant relative’s start-up will end badly. A terrific real estate deal is probably not a deal at all.
Not Doing Research:
Buying stocks and bonds can be risky and time-consuming. This is one reason behind the popularity of stock and bond funds. Research mutual fund fees and rates of return instead. A simple Web search for “best mutual funds 2016” brings up articles from US News & World Report, Kiplingers and The Street.
Do not attempt to pick stocks, based on intuition or amateur research or something in an interview with Warren Buffet. Google any guide to investing in stocks, and the advice will be to avoid trying to pick individual stocks. This is not something beginning investors can do.
Real estate is always of interest to investors. Here is another area where not doing the research can lead to financial disaster. Of course fixing and flipping houses is out of the question. Buying foreclosures or properties seized for unpaid taxes are two good ways to go broke. Buying an apartment building and becoming a landlord might be more realistic. In all cases, do some research on the true costs and risks are.
Going for the Big Score:
While it is possible to grow a $5,000 portfolio into $500,000 in a few years such a feat is out of reach even for experienced investment analysts and day traders. There is more luck than skill involved.
A second way of scoring big is to invest everything in that one hot stock. Sure, this new company might become the world’s largest supplier of lithium-ion batteries in a few years, but they are just as likely to be bankrupt or struggling to get by. Now almost all of your retirement fund rides on one sick corporation.
Following Investment Gurus:
The investment world is replete with fake gurus who prey on hopeful novices who think there is some secret method for doubling or tripling your money every 90 days. Any such method that could work is almost certain to be illegal. Anything that promises to come close is going to be risky and a sure way for a beginner to lose their investment. This advice about avoiding gurus comes partly from their tendency to promote the next “hot” company or dubious investment schemes like no down payment real estate investing and buying tax lien certificates.
Begin Investing with Preparation:
Do research, avoid chasing a big score and treat investment gurus with great caution. Learn how to minimize your risk through mutual funds. Learn more about bond funds, index funds and real estate investment trusts (REIT).