Robinhood has become an incredibly popular brokerage choice for investors,in large part due to its ease of use and the fact it works hard to make investing more accessible and more fun. Not surprisingly, many people using Robinhood are newer investors, which is great news because getting money into the market is essential to building wealth. So the more people who do it, the better.
But if you're a novice investor using Robinhood to make trades, there are a few key mistakes you can't afford if you want to maximize your chances of success and avoid potentially damaging losses that could undermine your wealth-building. Here are three of them.
1. Investing money you'll need soon
Since Robinhood makes it easy to start investing, even if you don't have a lot of money, you may be really excited to use the app to get your money into the market ASAP. There's just one problem: You first need to be in a financial position to invest. And that means you need to have money you're willing to tie up for a long time.
Investing money you'll need within two to five years is a recipe for disaster because the chances are simply too high that you'll have to pull it out of the market at an inopportune time. Whether it's an emergency fund, a home down payment, or your holiday cash, you don't want to put it in the market if you don't have time to wait out any possible downturns.
Just consider what might have happened if you invested money in February this year that you needed at the start of April. You could've been forced to sell during the depths of the coronavirus market crash instead of waiting until the recovery (which, in this case, was especially swift).
2. Investing in something you don't understand
Robinhood incentivizes making quick trades by posting a list of the most popular stocks and using other behavioral nudges to get you to buy. But you don't want to buy assets just because others have, or even because the company is a household name.
It's important to make sure you really understand anything you're considering investing in and that you have a sound reason for making the purchase, such as believing the company is poised for growth because of its innovative ideas and strong leadership team or its proven track record of success.
Unless you've taken the time to do your research, you have a solid investment thesis, and you understand why the investment is likely to perform well and how it fits into your portfolio, you have no business buying it.
3. Making buy or sell decisions based on emotion
Finally, it's imperative you don't buy stocks because of fear of missing out, or sell them as soon as the going gets rough. Doing that would almost assuredly lead you to buy high and sell low, the direct opposite of what you want.
It's hard not to react when you see everyone else making money, and even harder not to sell when you see your stock shares start to tumble and get scared of losses. But you need to decide what to invest in based on that sound strategy mentioned above, rather than reacting to market swings.
If you avoid these three rookie mistakes, investing on Robinhood (or with any other broker) can hopefully help build real wealth over time. Just be aware it can be harder than you think not to make these errors as a beginning investor, especially if Robinhood incentivizes you to act in a way that's not in your best interest.