4 mistakes first-time investors are always making, according to financial experts

  • If you don’t have a good investment strategy when you start out, you could lose money.
  • Investing money you can’t afford to lose, timing the market, and following trends are bad strategies.
  • Instead, you should focus on a long-term approach and a diversified portfolio. 
  • Check out Vanguard Personal Advisor Services® to get the investment advice you need to help build the life you want »

It’s easier than ever to invest in the stock market thanks to investing apps, and millions of Americans have gotten on board since the start of the pandemic.

In 2020, interest in investing apps like Robinhood surged, with retail trading rocketing up 25% thanks to activity by new investors. More recently, the excitement around GameStop and other meme stocks saw new investors flocking to investment apps once more.

But for most first-time investors, scoring a big payday by timing the market is unlikely. In fact, you’re more likely to make a mistake that will cost you. Below, financial experts share the mistakes they see first-time investors making over and over — and what to do instead.

1. Not building a solid financial safety net before investing

There are a few things you should achieve with your money before putting it into the stock market, says Adam K. Wright, financial planner at Wright Associates.

Paying off bad debt, such as credit card debt or high-interest loans, should be a priority. Bad debt is considered anything purchased that doesn’t grow in value. The higher the interest rate, the worse the debt becomes. Before investing, you should be at a point where you are able to pay off your credit card bills every month.

Wright says you should also have an emergency fund set aside that covers at least three to six months of your expenses before throwing money in the market. The higher the likelihood of losing your job, the more money you should have set aside.

2. Following social media trends without doing your own homework

Jovan Johnson, financial planner at Piece of Wealth Planning, has noticed a growing trend of young investors being guided by social media influencers or their own friends. Some influencers will tout their gains and show their brokerage account’s growth in a video, then share advice on stocks their followers should buy. But investing without understanding a company or its trajectory is a big mistake, says Johnson. 

“For example, the GameStop situation, it all sounds good, but without understanding how investing works and the risk involved, people that bought into Gamestop a day too late — they lost,” Johnson says. 

No matter how great something sounds, it’s always important to do your own homework and understand a company’s value so you don’t end up investing in a stock that’s over-inflated or a company that’s failing. Focusing on exchange-traded funds (ETFs) is one way of avoiding the volatility that’s often associated with investing in single stocks. ETFs are an investment vehicle that pool together a variety of assets that help diversify your portfolio. 

3. Not taking advantage of retirement accounts

Young investors tend to overlook the options they have for tax-advantaged retirement accounts, says Rebecca Boyd, senior vice president and wealth advisor at Frost Investment Services. Company-sponsored, plans like a 401(k), or individual retirement accounts such as Roth IRAs are great investment vehicles. They also allow you to skip the hassle of capital gains taxes that accompany a traditional brokerage account.

If your employer matches a percentage of your 401(k) investment, that’s additional free money towards retirement, Boyd says. 

4. Waiting for the ‘right time’ to invest

Some new investors think the best way to invest is to wait for the “right time,” says Boyd. But trying to time the market almost never works.

If you’re investing for the long-term — rather than trying to get rich quick on a hot stock — your best bet is to invest as soon as possible, says Ashley Ferguson, vice president and wealth advisor at Frost Investment Services. Waiting for opportunities to present themselves, such as a large correction, can potentially cause you to miss upside gains. It’s about time in the market versus timing the market, Ferguson says. 

Instead of trying to time the market, or waiting for the right time to invest, contributing a certain amount every month is a great way to cushion yourself from market volatility. The approach, known as dollar-cost averaging, reduces the chances of investing a large amount of money at the wrong time, like while the market is high. You can also use a robo-advisor, like Betterment or Wealthfront, that will build and maintain a diversified investment portfolio for you based on your goals. 

Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.

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