Newbie investors were unfazed by the epidemic, recession, and stock market rollercoaster.
A recent Charles Schwab research of over 500 investors indicated that 15% of all current U.S. stock market participants began their investments in 2020. Financial firms like PaydayNow said they established more brokerage accounts in the first quarter of 2021 than they did in 2020, indicating that the trend has not halted. Try Payday Now for free.
There are many opportunities for novice investors to get involved in the current market turmoil. As the S&P 500 and Dow Jones Industrial Average continue to set new highs, Bitcoin is surging. A mania for non-fungible tokens has consumers spending thousands of dollars on digital art. Dogecoin (the meme-turned-cryptocurrency) and GameStop’s stock climbed more than 8,000 percent in the first few months of 2021, thanks to a Reddit army of traders.
However, just because Wall Street (and the internet) have adopted new trends, it doesn’t imply that sensible investment guidelines have altered.
As Christopher Lyman, a financial adviser with Allied Financial Advisors LLC headquartered in Newton, Pennsylvania, says, “This isn’t a new period or distinct from anything that has transpired in the past.” Despite its new appearance, the tale is the same one repeated time and time.
History has taught us that investors who attempt to make a fast buck are almost always doomed. We may, however, learn from their errors instead of repeating them.
What are the most common blunders rookie investors make? We questioned financial professionals.
1. You can’t invest if you aren’t ready.
Don’t invest too early if you don’t have a solid financial base to rely on in an emergency, such as a job loss.
Haley Tolitsky, a financial advisor at Cooke Capital, a wealth management business headquartered in Wilmington, North Carolina, says the foundation involves making a budget, paying off any high-interest debt like credit cards, and building an emergency fund. In an emergency savings account, most financial experts recommend having three to six months’ worth of living costs, such as rent and utilities.
Trotsky also recommends taking advantage of your employer’s 401(k) match if you’re eligible for one. Before investing in a taxable brokerage account, contribute at least the maximum amount your employer will match.
2. Making deals for the short term
Days, weeks, or even months of trading might entice those who want to make money quickly. However, if you’re dealing with a significant portion of your portfolio, this might be pretty risky.
As Rookie York City-based financial advisor Sallie Mullins Thompson points out, “trying to timing the market is the largest error new investors make.”
According to her, it’s best to build an investing strategy based on your objectives, time horizon, and level of risk tolerance. Then, unless your goals or circumstances change, maintain the course and keep to your strategy.
What is the ideal time horizon for investing? The stock market’s daily movements have been almost random by academic studies. Every year that you wait, you have a two out of three probability of profiting. It’s roughly 19 out of 20 after ten.
3. Mistaking good fortune for the ability
A solid investment doesn’t always pay off, says Jeremy Finger, founder of Riverbend Wealth Management in Myrtle Beach, South Carolina.
Consorting Reddit users drove up the price of GameStop shares earlier this year, sinking hedge firms shorting the video game company. Some investors, however, lost a lot of money when the stock price subsequently dropped. Cryptocurrency, another popular investment option, has also proved to be a risky one. If you gain money on one hazardous investment, do not discard your investment knowledge.
Finger advises investors to take a long-term approach to investing by spreading their money over various assets.
“The dull stuff works.”
4. I was avoiding a lack of variety.
Don’t neglect the importance of broadening your investment horizons. When one portion of your portfolio suffers, you may be sure that the other parts of your portfolio will be untouched. In another way, investors who owned both Treasury bonds and equities in March of 2020 probably felt less concerned while examining their portfolios during the financial crisis.
You may get swept up in all the hype and forget about the natural hazards involved,” says a financial advisor in Wilmington, North Carolina, who goes by the name Matt Stephens. Although diversification may seem tedious, it may safeguard you better if things go awry.
Include small and foreign firms in your stock investments and those in the S&P 500 index.
Everyone’s definition of diversification will be unique, based on their financial circumstances, objectives, and time horizon for retirement. For example, someone with more than ten years till retirement may only have 10% to 15% in bonds and 85% to 95% in stocks, but someone within five years of retirement may have 40% in bonds and 60% in equities, according to Money’s previous study on the subject.
5. Not remembering to pay taxes
You may find it exhilarating to start investing for the first time – until you receive the tax bill.
Tricia Rosen, the owner of Access Financial Planning, an independent fee-only financial planning business headquartered in Andover, Massachusetts, says that although it’s fantastic that investing has become more accessible to more people, many first-time investors are not aware of the tax ramifications of trading.
The more you know about taxes, the less likely you will be hit with a surprise charge when you file. It is taxed as income when you sell an asset (such as a stock, bond, or most mutual funds) after less than a year. Capital gains taxes apply if you hold a security for more than a year and are taxed at 0%, 15%, or 20%, depending on your income. Gold, for example, is classified as a “collectible” and is taxed at a rate of 28 percent, even if it is held in an ETF.
If you sell an investment and earn a significant profit, you may also be required to make quarterly projected payments on the gain. According to the Internal Revenue Service, it is recommended that you pay your taxes if your tax due for this year and last year is less than 90 percent and 100 percent, respectively, of your expected withholdings and refundable credits (whichever is smaller).