12 Mistakes Beginning Investors Should Never Make

Millions of Americans have sat on the sidelines during the four-year bull market, nervously wondering if they should put their money at risk, and thereby having missed out on some colossal gains. Yet beginning investors are always afraid of making costly mistakes, and unfortunately, that only leads to more procrastination -- and more missed opportunities.

The best way to avoid common investing mistakes is to get fair warning about them before you make them. With the goal of giving beginning investors knowledge they can use to steer clear of potential pitfalls, here are 12 mistakes that beginning investors often make.

1. Paying too much in expenses to invest hurts your results right out of the starting gate. Instead of choosing funds with up-front sales loads and hefty annual expenses, aim your fund investments toward no-load funds with lower fees. Over your lifetime, the savings can add up to hundreds of thousands of dollars.

2. Owning multiple funds doesn't mean you have a safely diversified portfolio. Often, different funds own the same underlying investments, leaving you doubly exposed if bad news hits.

3. Chasing performance will almost always leave you on the back end of a trend right as it reverses. Longtime investors in SPDR Gold (NYSEMKT: GLD  ) and iShares Silver (NYSEMKT: SLV  ) , for instance, earned huge profits over the past decade. But those who climbed on the precious-metals bandwagon in 2011 have seen huge losses. Being late to the game isn't always fatal, but you should never expect the same returns in the future as an investment's past results.

4. Making knee-jerk stock purchases and sales immediately after important news leaves you vulnerable to professional investors, who step in during such periods to take advantage of emotionally driven beginning investors. Waiting until the dust settles will often get you better results.

5. A great company isn't always a great investment. Hot companies often have their stocks bid into the stratosphere, at which point they've lost most of their chances to produce big returns. Sometimes, you have to concede that you've missed out on most of the potential gains a stock can produce and look for other opportunities.

6. Investments with high dividend yields don't always produce good total returns. Often, high yields signal danger, as the recent experience of Annaly Capital (NYSE: NLY  ) and American Capital Agency (NASDAQ: AGNC  ) show. Rising interest rates have crushed those stocks, costing investors the equivalent of two years' worth of dividend payments just since the end of April. For funds, distribution yields are often meaningless, as they can include a portion of your own invested capital being returned to you.

7. Making frequent trades will cost you in several ways. Not only do you incur greater transaction costs, but any gains you earn on investments held for a year or less are taxed at higher short-term capital gains rates that can be more than double longer-term rates.

8. Not using tax-favored retirement accounts also provides a big drag on your overall returns. Roth IRAs can give you tax-free growth that can save you from having to pay taxes of more than 40% on your investment income for certain taxpayers, while even traditional retirement accounts let you defer taxes on income and capital gains within the account until you make withdrawals.

9. Failing to make enough contributions to your 401(k) plan at work to max out any employer match is simply giving up free money. Sometimes, you have to be careful to weed out bad investment options in your 401(k), but usually, you can find a good enough choice to justify grabbing the matching contribution.

10. Taking money out of an old job's 401(k) rather than rolling it over to a new 401(k) or IRA account will not only cost you a substantial amount in taxes and a 10% penalty in most circumstances but also leave you with that much less in retirement savings down the road. Moreover, the opportunity cost of not investing that money is even greater.

11. Watching financial television will generally just whipsaw your opinions in both directions, leaving you more confused than you were when you started. You're better off getting news and insight from sources that are less concerned about short-term trends and that instead will give you a better sense of long-term prospects.

12. Waiting too long to start investing takes away the biggest asset you have as a beginning investor: time. Markets rise and fall over shorter periods, but in the long run, picking investments that will steadily climb in value produces the wealth that will help you reach all your financial goals.

Get started today!
The financial markets are a scary place for beginning investors to get started with their investing. But with so much of your financial future at stake, you owe it to yourself to face the challenge. Avoiding these mistakes should give you more confidence that you can invest successfully.

At the Fool, we're committed to helping the millions of Americans who've waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. In our brand-new special report "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.


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  • Report this Comment On July 18, 2013, at 11:05 AM, JessicaMcMillen wrote:

    I agree with everything said. I have been following these guidelines for many years and it proves to be a smart, solid way to build wealth over time. Since my 1st day of employment I have been maximizing contribution to my 401k plan which also means that I started early, didn't try to time the market, and benefited from a company match. Sometime later I opened a brokerage account with Fidelity and started to invest myself. Things were OK but not great. Maybe this is the way it happens to most of us. After several years I decided that is time to get a professional opinion.

    Since I am not a millionaire I can't afford the big guys fees. My experience with one of them was bad. So I found a few solutions which I can share with all: three large national networks of advisors: Paladin Registry: www.paladinregistry.org, Alliance of Cambridge Advisors: www.acaplanners.org, and Garrett Planning Network: www.garrettplanningnetwork.com.

    One interesting site that claims to be fee-only, certified financial planner is Plan&Act: www.planandact.com. Another one I am not 100% sure if they receive commissions is My Financial Advice: www.myfinancialadvice.com.

  • Report this Comment On July 18, 2013, at 11:44 PM, mrplow2000 wrote:

    This is a really useful tool that I found to do a quick fundamentals check on any investments you are considering:

    http://simplistickr.com/

  • Report this Comment On July 19, 2013, at 12:53 PM, MCCrockett wrote:

    Failing to maximize your employer's contribution to a 401(k) is extremely important. I would stay away from the "conservative" offerings in the plan. You can switch to those after you retire.

    In the Eighties when my firm first offered a 401(k), I invested entirely in company stock. At the time, the company match was always made to the company stock fund. This might not be a good idea unless you work for a company that is likely to be acquired.

    My company was acquired 5 times during my career. Each time, stockholders received a stock premium plus cash that greatly increased the value of my 401(k).

    The sixth acquisition only involved the wholly owned subsidiary that my original company was a part of and the 401(k) wasn't transferred. I moved the 401(k) to an IRA in 2002 where I could diversify my portfolio more effectively.

    Unfortunately, by the time the Roth IRA became available my income had risen to a point where I had to roll my 401(k) into a traditional IRA. I couldn't afford the income taxes that would need to be paid.

  • Report this Comment On July 19, 2013, at 5:10 PM, Seanickson wrote:

    I'd be careful about tax-free accounts. Many investors may fall in the 15% tax bracket (taxable income up to $72,500 for married, $36250 for single). Those investors have no taxes on long-term capital gains or qualified dividends and it makes a lot of sense for them to keep their investments in taxable accounts.

  • Report this Comment On July 19, 2013, at 6:00 PM, Seanickson wrote:

    It may not be best to max out retirement contributions. Many investors, particularly beginner ones, are in the 15% tax bracket(taxable income up to $72500 for married, $36250 for individuals). Those investors incur no tax on long-term capital gains or qualified dividends. It makes a lot of sense for these investors to keep their investments in taxable accounts.

  • Report this Comment On July 19, 2013, at 6:10 PM, boolanger wrote:

    All good points but some are too vague. For example #1 states not to pay too much in expenses. How much is too much? Peter Lynch's Magellan fund charged 3.5% and Jim Cramer, I believe charged something like 5% plus a percent of profits, yet both returned much greater returns, after expenses, then their benchmark. Perhaps you should state "Be sure to compare investment results and risks carefully and often after all expenses have been paid vs. the alternatives". Or perhaps "It is clearly foolish to pay high fees if there is poor performance. However, do not fear higher fees for clearly superior performance".

  • Report this Comment On July 19, 2013, at 8:32 PM, rsinsheimer wrote:

    @boolanger -- given that roughly 80% of the mutual funds underperform SPDRs, along with the extremely tenuous correlation between fees charged and performance delivered that only a psychic could know for a fact that they were buying a Magellan Fund vs. a dud.

    In other words, buy an S&P 500 EFT or mutual fund and sleep well at night.

    In all candor, I (largely) ignore my own advice here, but this is what I've told my daughter (who couldn't care less about the intricacies of the market) to do.

    Since this is an article for beginners, and many people never advance beyond novice level, I think what I've said is good advice for most folks. :^)

  • Report this Comment On July 22, 2013, at 8:02 AM, gthurlow wrote:

    In the spirit of low fees, the fees expense for your FOOLX fund are listed by Morning Start as 1.47%.

    That is not much better than American Funds "Capital World Growth and Income fund" 1.61% C-Share.

    Does Walk the Talk not apply to your fund offering?

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