Episode #22: How NOT to invest in the stock market (3 beginner mistakes to avoid)
Today’s episode of The How To Adult Show is going to walk you through the top 3 beginner mistakes to avoid when you invest in the stock market. Whether you’ve already been investing for a few years, or you haven’t started yet and are just trying to learn a bit more and get your bearings before you start investing, this episode is for you. Now if you’ve caught any of the most recent episodes, most recently episode #23: 3 Tips to understand the stock market before you start investing, you’ll have heard me talk a bit about stock market investing before. The most important point I want to get across here is that investing in the stock market is not just for older people, it’s not just for men, or just for rich people, it’s actually an integral part of planning and saving for your future. So much so that when we talk about ‘saving for your future’, we should actually say ‘investing for your future’, because it’s really difficult to save away enough money for your retirement without using the stock market to grow and compound your money. So, if you’re interested in learning more before you get started, then make sure you digest and really take to heart these 3 beginner mistakes that you need to avoid when you’re investing.
Mistake #1: Trying to time the market.
Timing the market means trying to make predictive decisions about buying and selling stocks to try and maximize your financial gain. It means actively managing your investments to try and make the right decisions about buying low and selling high. The problem is though, numerous studies and good old statistics show us that nobody ever really outsmarts the system of the stock market. There are studies done where investors who try to actively time the market and make predictive decisions to maximize their gains are compared to a randomly generated computer algorithm that makes similar trading decisions, and the random computer decisions performed better than the humans who were trying to make decisions to outsmart the system and ‘buy low’ or ‘sell high’. The safer way of investing in the stock market is to have a long term and diversified investment strategy, which means being invested for 10’s and 10’s of years.
In the short term, it is true, people can and do make good decisions when buying and selling stocks, and sometimes people do end up making a lot of money from it, but the whole idea is that in the long term, the wrong decisions outweigh the good decisions. As a whole, people don’t make as much money when they try and time the market. Trying to time the market and pick stocks like this is basically gambling, and this is why so many people have the misconception that any form of being invested in the stock market is gambling. It doesn’t have to be gambling if you don’t act like a gambler!
No matter how much you want to test this theory, and no matter how smart you think you are, you just can’t beat statistics friend. Especially if you’re just getting into investing and aren’t devoting your entire life and career to understanding and working with the system. You will not outsmart it in the long run, so don’t be that person. Even someone who has arguably ‘won’ the stock market over the course of his life, Warren Buffet, is famously quoted as saying ‘time in the market beats timing the market’. What he’s saying here, is that a long term and strategic buy and hold strategy will always statistically win out over actively trading your investments to try and time the market. The statistics show that this doesn’t work, ever, and statistics don’t lie. So, mistake #1 that you need to avoid, trying to outsmart the market by timing it. Don’t freaking do it!
Mistake #2: Not being diversified
The second beginner mistake people will make is falling in love with a company or an idea and investing too much into that company or industry, aka not diversifying their investment portfolio. Now I’m not here to ‘sell’ you on the stock market or any stock market based products, and this platform is all about sharing honest and real information with one another so I just want to acknowledge that the stock market is volatile and there can be risks with investing, especially if you have really specific time horizons that you need to stick to. Stocks go up and down, the market goes up and down, the idea is that in the long run it always goes up. This is where diversification will help you. It is entirely possible that over the course of your investing life, a stock or an entire industry of stocks will crash or go down. By diversifying your investments, you’re mitigating this risk but not putting all your eggs in one basket.
Diversification can mean different things to different people, and there are numerous ways to diversify your investment portfolio. The most straightforward way to make sure you’re diversified is to use index funds, mutual funds, and ETF’s. I could do a whole episode talking about what each of these are and how they work, but the important thing to learn here today is that buying any of these investment products means that you’re automatically diversified, because by nature a mutual fund, index fund, or ETF is made up of multiple stocks, just organized in different ways depending on what you buy. They each work a little bit differently, but as a whole the idea is that diversification is built in to the fund, and therefore safety and protection from the volatility of individual stocks is also built in. Another example of diversification is investing in things that are not part of the stock market, for example real estate or currencies. The overall idea is not to fall in love with one company, or one industry that you think is on the rise, put all your eggs in one basket, and then get burned by the inevitable crash that may happen if you’re investing over a long period of time.
Mistake #3: Being Impatient
Investing in the stock market and making financial gains from it is a long term play. Looking at your accounts every day is not going to help you, and will probably lead you to make some bad emotional decisions and cause you to freak out at some point in time. For example, at the beginning of the pandemic, markets took a dive, people panicked, people sold their investments at a fraction of their value, and decided to ‘wait it out’, but then things bounced back quickly, so all of a sudden buying back in was really hard without accepting a huge loss. It would have been better if these people hadn’t looked at their tanking portfolios that day, panicked, and made the emotional decision to get out of the market.
If, like me, you’re young, then you have decades to be invested in the stock market before you ever start to approach using those accounts for your retirement. So treat it like the long term game that it is. This also goes back to the first point, don’t buy into the temptation of starting to gamble with your investments to try and make short term gains by timing the market. I’m going to say it again, for all you young people out there like me who are getting started in this, ‘time in the market (that means how long you’re invested for) beats timing the market.’ Buying, holding, and staying invested in the stock market for decades will give compound interest the time to work for you and do its magic. If you have no idea what I’m talking about, then after this episode you need to go back and catch episode #23 where I explain compound interest in a bit more detail. While this episode is all about the 3 mistakes to avoid when you start investing, episode 23 is all about the three concepts you need to understand before you start investing, so the two episodes really go hand in hand.
So, remember, don’t be impatient, don’t constantly check your investment accounts, and lose money by constantly making lots of little adjustments. Investing isn’t about winning or losing, it’s not about beating the system and being the next rags to riches story, it’s a long term tool for you to use to make sure that you have some very comfortable retirement years. I’ll say it again, if you’re young like me, this is a long term play. I’m talking, longer than many of us millennials have even been alive for yet, which I know is hard to wrap your head around, but that’s how this works. Accept it, and if you’re still feeling like playing a game with some of your extra cash, go play, but don’t play with your retirement investment accounts.
So, to recap, if you’re new to investing, or are just starting the process of learning about investing for your future and how to manage your personal finances properly, I recommend taking this episode to heart and making sure you avoid these three beginner mistakes.
Don’t try to time the market. Don’t do it. You’re not smarter than statistics and don’t let your little lizard brain tell you differently.
Don’t put all your eggs in one basket. Make sure your investment portfolio is diversified. Don’t fall in love with the tech industry and put all your eggs into that basket. Diversifying is the only way to guard yourself against the inherent risks and volatility of the stock market, and it will guard you well over time.
Don’t be impatient. If you’re a young investor like me, it’s important to embrace the long term nature of this savings plan. Don’t drive yourself crazy by checking your accounts all the time. Embrace the power of compound interest, and embrace that there’s nothing sexy about being an investor. It’s a ‘slow and steady wins the race’ kind of plan, and don’t let anybody with glitzy cars or a one-in-a-million rags to riches story ever tell you differently.
So, should you start investing?
Before I wrap up, I want to make note that stock market investing is not for everybody to get started with right away. Before you start investing in your future, it’s really important to make sure that you’ve got your present financial situation taken care of first. If you’re still struggling to make your basic payments, do not take a chunk of money and invest it yet. Before you start investing you need to make sure that:
You have your basic life needs taken care of.
You should have a fully funded emergency fund.
You should not be carrying any credit card or other high interest debt.
You should not be investing any money that you’re really saving for something important like a down payment that you’ll need within a specific period of time. BUT you should be saving for both your retirement and big life goals like a down payment at the same time.
Once these areas of your financial housekeeping are in order, then you can start to plan, save, and invest for your future. And when you turn your attention to it and work at it, it shouldn’t take too long for you to get there.
So, if you want to get started investing, but need to improve your personal financial situation first, I recommend signing up for the free beginner finance course that’s currently being offered by the how to adult school. This is a back to basics course that spans 7 days, and will send you a new personal finance lesson once a day by email that’s quick to learn and that will have a fast and easy action you can take to implement that lesson. By the end of the 7 days you should be feeling confident about opening up your bank account, not living in fear of your credit card statements, and ready to start looking at working towards your bigger financial goals.
Also, if you enjoyed this episode and episode 23, I have a few resources you can check out to learn a bit more about investing and long term financial planning over in the finances branch of the resource library on the how to adult school website. Personally, I recommend picking up a copy of the book ‘the simple path to wealth’ for some really solid and actionable theory about how to start saving long term and investing for your future.
Linked Resources
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