For example, if you have a relatively high risk tolerance, along with the time and desire to research individual stocks (and learn how to do it right), that could be the best way to go. If you have a low risk tolerance but want higher returns than you'd get from a savings account, bond investments (or bond funds) might be more appropriate.
If you're like most Americans and don't want to spend hours on your portfolio, putting your money in passive investments like index funds or mutual funds can be a smart choice. And if you really want to take a hands-off approach, a robo-advisor could be right for you.
How to track your investments
First, you don't need to check your investments every day. One of the biggest rookie mistakes is paying too much attention to your long-term investments and making emotional decisions based on short-term performance.
The average investor underperforms the market, according to several studies. A key reason is that they make knee-jerk reactions instead of just leaving investments alone.
Having said that, tracking your investments (reasonably often) is an important part of the journey. Your brokerage app or website should allow you to view your entire investment portfolio, and you may be able to set up alerts. For example, I get a push notification on my smartphone if any of my stocks move up or down by more than 5% in a single day.
There are also personal finance and investment apps that will allow you to build your own watch lists of stocks and/or import data from your brokerage account to track your portfolio. This can be especially useful if you have accounts at more than one brokerage.
Key mistakes first-time investors should avoid
As we've discussed, knowing how to invest money can be extremely important when it comes to building wealth and creating financial security. But it can be even more important to know how not to invest.
For one thing, avoid over-trading. I've mentioned this elsewhere in the article, but it's important enough to repeat. One of the most common reasons for poor investment performance is constantly moving in and out of stocks and funds.
There's a good reason for this. It's common knowledge that the goal of investing is to buy low and sell high, but our emotions tell us to do the exact opposite. When stocks go up and we see everyone else making money, that's when we want to buy. And when stocks drop, it's our instinct to sell before things get any worse.
Other common mistakes for first-timers to avoid:
- Don't try to day trade, meaning buying stocks that are going to go up over the next few days. Leave that to professional traders.
- Don't invest with margin (borrowed money). Not only do you pay interest on the money you borrow, but using margin can also amplify your losses if things don't work out.
- Don't even touch options trading until you really know what you're doing.
- Don't confuse investing with speculating. There can be room for both, but it's important to know when you're taking a risk that could wipe out your entire investment.
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