Common Investing Mistakes

Once you’ve familiarized yourself with the basics of investing, getting your money to start working for you is pretty straightforward. Despite this, it’s quite common for people to realize down the road that one simple oversight or a single seemingly inconsequential decision has cost them the opportunity to earn thousands, sometimes tens of thousands of dollars in returns.

Let’s make sure these common mistakes don’t apply to you and your investment strategy.

Mistake #1: Contributing to an IRA or brokerage account and not investing the money#

I’ve heard this one too many times and it breaks my heart every time. Someone opens an IRA or brokerage account and puts money in, expecting that a couple years from now they’ll log in again and check out their investment’s growth. After a year, they notice their account’s balance has grown by a dollar. What happened?!

An IRA, a brokerage account, a 401k, or any other type of account is just that - an account. The account itself is not an investment.

Think of it like this: when you get your paycheck, that money goes into your checking account. Then you have to spend that money on things. It’s a two step process: fund the account (by depositing the paycheck), exchange the money for goods and services (by buying things).

It’s exactly the same story with any investment account. Fund the account, then buy equities in the stock market with that money (preferably broad market index funds like ones that track the S&P 500 or the total stock market). By not investing the money you deposited into the account, it sits as cash, typically earning less interest than the rate of inflation.

Mistake #2: Not taking advantage of your employer’s 401k match#

A 401k match is when your employer offers to contribute some percentage of your salary to your 401k, often requiring you to also contribute at least that amount. In an example where they offer to match 4%, this would mean that if you contribute 4% of your paycheck to your 401k, your employer will also contribute an additional 4% with no extra out of pocket cost to you. It’s literally free money.

Does your employer offer a 401k match? If you can afford to contribute enough to earn the entirety of this match, you should. Always. Why? In the example above, it’s an immediate 100% return on investment. Contribute 4%, they’ll add an extra 4%, so 8% of the value of your paycheck goes into your 401k, but the paycheck itself is only decreased by the 4% you personally contributed.

Let’s look at a concrete example. Say you make $45,000 per year, are paid semi-monthly (ie. two times per month), and your employer matches 4%.

Each paycheck has a gross (pre-tax) value of $1875. Your 4% contribution would therefore be $75, so your gross paycheck is decreased by $75 to $1800. That $75 goes into your 401k, and your employer adds another $75 to your 401k. Now you have a paycheck of $1800 and $150 in your 401k.

This is almost certainly the highest guaranteed return on investment most people will ever have the opportunity make.

I cannot stress this enough - if your employer offers a 401k match, take advantage of it. If you don’t, you’re effectively taking a pay cut, and who wants that?

Mistake #3: Investing emotionally#

We’ve all seen headlines that strike greed or fear into our heads and make us question our investment strategies. Things like certain stocks gaining 200% in a month have us thinking:

If I had been invested in that, I could have made tons of money! I’m missing out!

Meanwhile other articles about how a recession is obviously right around the corner may make us worry:

I should sell my investments now so that when it drops, I can buy back in at a lower price.

Let’s take a moment to think rationally and poke some holes in these thoughts.

Sure, you could have been invested in a single volatile equity that gained 200% in a short period. You could have also been invested in a different one (or even the same one during a different short time period) that lost 80% of its value. It’s only obvious which one of these things, if either, was going to happen with the benefit of hindsight.

Are you willing to risk potentially losing your entire investment in the hopes of some outsized gains that may never come? I know I’m not.

On the flip side, in regards to adjusting your investment strategy before an “obvious” recession or market correction… nobody is able to see the future. Nobody knows for sure what’s going to happen to the state of financial markets in the short term.

By selling your positions to avoid a market correction, you could get lucky and have the opportunity to buy back in at a cheaper price. Or the market may never see levels this low again and now you’re forced to miss out on gains (and pay taxes for the privelege of missing out on gains if you made this move in a brokerage account).

I’ve made the mistake of investing emotionally before. It’s stressful and almost always leads to having less money in the long run. After recognizing these errors, I learned that the most important emotional characteristic a person can have when it comes to investing is humility. Accepting that nobody knows what’s going to happen to financial markets in the short or even medium term. And if we can’t predict the near future, why make any changes to our strategy of investing for the long term?

Conclusion#

These are some of the most common mistakes that people make in the stock market. If none of these apply to you, you’re well on your way to a successful career of long term, passive investing!