16 Costly Investment Mistakes New Investors Make

Investing could help you grow your wealth, but these 16 investment mistakes could hamper some of your potential.

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Updated May 28, 2024
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When you first start investing, it can feel difficult to know what is and isn’t a smart money move. You can read plenty of advice in money books, consult a financial planner, or learn from top investment apps. Even with this knowledge and help, it’s still possible to make plenty of investing mistakes.

We’ve compiled 16 of the most common investing money mistakes below so you can learn now and avoid figuring them out the hard way.

Opting for expensive brokerages

Expensive brokerages charge you more money to make your investments. Although some expensive brokerages may provide a higher level of service or advanced features, most people don’t necessarily need those features.

Instead, you may be able to save money by checking out our lists of the best brokerage accounts and best investment apps. Many of these options are low-cost and still provide many valuable tools and features you can use to help you invest.

Not having a plan

Without a plan, it’s hard to know what to invest in, when to buy, or when to sell. You may end up making investment decisions without understanding their true long-term implications. Even worse, you may not reach your goals.

A solid investment plan starts with creating goals for your investments. Then, you can build a portfolio that helps you achieve those goals. Over time, you can regularly review your portfolio to make sure it still aligns with and is helping you work toward your goals.

Not doing their research

Investing isn’t a game, but unfortunately, some apps make it feel that way. You should make investment decisions only after researching the investments you’re considering.

If you’re investing in a mutual fund or exchange-traded fund, consider looking at the prospectus to learn more about the fund. If you’re investing in stocks, read through the financial statements and accompanying management commentary companies disclose. You can also read analyst reviews to see how investment professionals view a particular fund or stock.

Forgetting about fees

New investors may not pay much attention to fees, but they could have a massive impact on your returns over decades. For mutual funds and ETFs, the expense ratio is one of the most important fees to look out for. It’s common for two funds investing in similar assets to have different expense ratios.

To give you an idea of how big an impact fees can have, let’s say two people invest $10,000 today and never add another penny. Both investments earn 8% annual returns for 50 years, but one has a 1.00% annual expense ratio, and the other has a 0.50% annual expense ratio. The person with a 1.00% annual expense ratio ends up with $327,803, whereas the person with a 0.50% annual expense ratio ends up with $420,275. That’s more than a $90,000 difference due to a simple 0.50% change in the expense ratio.

Investing too much

Investing too much sounds like a good problem to have. You’d think this would help you end up with more money over the long term. That isn’t always the case, though. People who invest too much money often forget to set money aside for other parts of their financial plan.

For instance, they may not have a fully-stocked emergency fund. If they lose their job or face another significant emergency, they may have to sell some or all of their investments to cover the costs. If your investments are increasing in price, this isn’t too big of a deal even though it isn’t necessarily ideal.

The problem comes when you have to sell when investment prices have decreased. Often, financial turmoil in the stock market coincides with layoffs. You may get laid off when investment prices are hitting their lows, which forces you to lock in losses on your investments.

Investing too little

When you first start investing, you may not want to invest much if you’re afraid of losing money. Getting started investing, even with small amounts, is better than not investing at all. However, not investing enough early on could significantly hamper your goals.

One of the biggest factors impacting your investment balance is time, assuming you stay invested for the long term for a goal like saving for retirement. The money you invest first has the longest time to grow. If you start small when you can afford to invest more, you may regret not putting more money toward investing as you near your goal. That said, investing even with small amounts today is much better than putting off investing to a future date.

Not diversifying their portfolios

Diversifying your portfolio essentially spreads your investments out over several investments rather than putting all of your money in a single stock. It could have seemed wise to invest all of your money in Google when the company first offered its stock publicly. The company grew enormously and made investors wealthy.

Unfortunately, the opposite could happen. A company you invest in might go bankrupt and leave you with nothing. Diversifying your portfolio across several investments might help the winners and losers even each other out and could potentially provide more steady returns over the long term. However, remember that all investments still come with the risk of loss.

Expecting too much

Some personal finance personalities suggest you can expect high investment returns over the long term, such as 12%. Although this may be possible sometimes, basing your investment plan on high numbers is probably ill-advised.

When you plug a return on investment number in your plan, it impacts how much money you need to invest to reach your goals. The higher the return percentage, the less money you need to invest. Inputting a rate of return that’s too high means you might not invest as much as you should to reach your goals.

If your returns don’t match your assumptions, you may have to add a bunch of money to your investment account later to catch up on your goals. The other alternative could be delaying your plans. Neither is the desired outcome.

Diving into a margin account

You might have heard you can use margin to improve your investment returns. Essentially, margin means taking out debt to invest. When you take out that debt, you pay interest on the amount you borrow.

Investing on margin is risky in multiple ways. First, the interest reduces your returns. Let’s say you pay a 5% interest rate on the margin loan. If you get an 8% return on your investment, that means you net only 3% after interest costs.

Things get worse if your investments don’t work out as you had planned. If the investment decreases in value by 10%, you still have to pay back the entire loan, plus interest. It may be a good idea to avoid margin accounts unless you’re incredibly confident in your investment plan.

Trying to time the market

Trying to time the market sounds like a good idea. After all, buying low and selling high would maximize your returns. Sadly, it’s virtually impossible to do in real life.

It’s easy to look back at a 10-year chart and see the peaks and troughs. Figuring out where those peaks and troughs are as they happen is completely different, though. You have to be right when you buy, be right when you sell, and be right when you reinvest the proceeds. The chances of getting all of those timing factors right are extremely small.

To drive this point home, one simple stat can help. JPMorgan Chase & Co. reports that if you missed the best 10 days in the market investing in the S&P 500 from Jan. 2, 2001, through Dec. 31, 2020, your annual returns would drop from 7.47% to 3.35%. That’s more than a 4% yearly return difference.

Panic selling

Risk tolerance is the concept of figuring out how much risk you can handle with your investments before affecting your investing decisions. For instance, one person may not feel comfortable with their assets declining more than 20%, whereas another person could stomach a 40% decline. The person that can handle the more significant decrease is said to have a higher risk tolerance.

If you invest in assets that are riskier than your risk tolerance suggests, you might find yourself panicking when the assets decline more than you expect. A common action when this happens is panic selling to avoid further losses. Unfortunately, this locks in any losses that have occurred. If the stock increases in the future, you’ll miss out on those gains.

Trading too often

Trading too often could potentially hurt your portfolio performance in several ways. Ideally, you’d be reducing your losses and increasing your gains, but that might not be possible unless you get incredibly fortunate. Each time you trade, you risk missing out on returns. The JPMorgan study citing missed days in the market is a perfect example of this.

You can also hurt your finances when it comes to taxes. Investments held a year or less are subject to ordinary income tax rates rather than the preferable long-term capital gains tax rates. We’ll cover more on that in a minute.

Investing heavily in volatile assets

Volatile assets, or assets that change in price often, might provide the opportunity for more significant positive returns. They can also provide large negative returns. It could be tempting to invest in these assets to take advantage of big potential returns, but doing so might be detrimental to your investing goals.

Volatile assets don’t need to be avoided entirely, though. You can choose to allocate a small portion of your portfolio to volatile holdings if you want exposure to them. Just don’t opt to put all of your eggs in one basket unless you can afford to lose that money.

Trusting social media investing advice

Social media is full of gurus trying to sell products, and these aren’t limited to physical goods or multi-level marketing schemes. Plenty of people try to hype up investments, such as cryptocurrency, or their own courses, such as how to become a better day trader.

No one should blindly follow any financial advice on social media, even if you follow an expert. The advice may be suitable for some people, but not be targeted to someone in your particular situation. Each person is at a different point in their investing journey. You should always do your own due diligence to make sure an investment aligns with your goals before deciding to invest.

Forgetting about taxes

Don’t forget about taxes when you invest. Carefully planning your investments based on their tax impacts could help you save money either today or in the future. Investments in a regular taxable investment account often require you to pay taxes on distributions when you receive them. You also have to pay taxes on gains when you sell. If you hold assets for more than a year, you may qualify for lower long-term capital gains tax rates.

The type of account you invest in could impact your tax bill too. Traditional retirement accounts such as 401(k)s and individual retirement accounts may give you a tax break today for contributions you make to the account. Roth accounts, such as Roth 401(k)s and Roth IRAs, don’t give you a tax break today but could allow you to withdraw money tax-free in retirement. Carefully planning around these tax aspects, and more, might help you keep more of your hard-earned money.

Not continuing to learn

The last thing you want to do as an investor is get complacent. The world is constantly changing. New investment apps may come out that might allow you to invest in an even lower-cost manner. Tax laws may change, which require you to tweak your investment plan to stay optimized.

New companies may break out, as Google did in the 1990s and 2000s, which could provide tremendous opportunities for growth. If you get complacent, you could miss out on all the ways to optimize your investments as time passes.

The bottom line

Educating yourself about the costly mistakes new investors make can help you avoid headaches and unnecessarily losing money. Even so, it’s important to remember that investing money is a very personal activity. Each person’s situation and goals are different. If you need help figuring out an investing plan for you, consider consulting a fee-only fiduciary financial planner for help.


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Author Details

Lance Cothern

Lance Cothern, CPA is a personal finance writer and founder of MoneyManifesto.com. Lance's work covering several personal finance topics has been published in U.S. News & World Report, Business Insider, Credit Karma, Investopedia, and several other publications.