Even seasoned investors make mistakes at times. But when you start investing, you're prone to letting your emotions take over. Maybe you get excited when the stock market surges and want to take on more risk -- or you panic when it plunges and are tempted to sell off.
Don't let your emotions stand in the way of making rational decisions about your money. Here are five mistakes beginning investors make that you can easily avoid.
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1. Waiting for the perfect time to invest
If you're nervous about investing, now is never going to seem like the right time to invest. The stock market will always look like it's overpriced or too volatile or on the brink of another crash. Or perhaps you think that now isn't the right time for you to invest because you don't have much disposable income.
There are a few situations where holding off on investing makes sense for your finances. For example, if you have high-interest credit card debt, you should pay it off before investing beyond your employer's 401(k) match.
But overall, delaying is possibly the worst investing mistake you can make. A dollar invested in your 20s will go further than a dollar invested in your 30s. More time in the market has a better payoff than attempting to time the market. If you practice dollar-cost averaging and only invest money that you don't need in the next five or 10 years, short-term market conditions really don't matter.
2. Trading frequently
With platforms like Robinhood and TD Ameritrade offering commission-free trades, it's easy to ignore the high costs of frequent trading. But the majority of investors who buy and sell frequently underperform the market over time. Plus, they miss out on lower long-term capital gains tax rates -- 0%, 15%, or 20% -- which you get when you sell a security you've held for at least a year.
Short-term stock price fluctuations are often driven by emotion, rather than a stock's actual value. Trading based on these ups and downs is gambling, not investing. The market rewards those buy-and-hold-quality companies for the long run.
3. Picking individual stocks based on the news
By the time you hear about a winning stock on TV, you're late to the party. In jumping on the bandwagon, you're likely to pay inflated prices because all the hype is driving up the price. That doesn't necessarily mean a stock is a bad investment just because everyone's talking about it. But you're certainly not going to find any bargains by investing in what everyone else is investing in.
4. Buying stocks because they're cheap
Cheap stocks tend to be cheap for a reason. The cheapest among them are penny stocks, which usually sell for a couple of dollars or less. Those prices that look like a bargain typically reflect the fact that the issuing companies are either unproven or financially troubled.
Remember this oft-quoted nugget of Warren Buffett wisdom: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
It's worth paying more to invest in stocks issued by companies with a solid history, a competitive advantage, and potential for growth. Buying fractional shares can be an affordable option for new investors seeking out high-quality stocks.
5. Cashing out when things are bad
No one thinks they'll be the one who buys high and then sells low in a panic. But in reality, it happens because people are poor estimators of their actual risk tolerance.
If you're new to investing, it's a must that you commit to staying invested through the downturns. It's even better if you're willing to capitalize on a bear market and invest even more.
Market crashes and corrections are inevitable. It's not a question of "if," but rather, "when." Though it's scary to see your nest egg's value plummet, the majority of downturns are short-lived. The great thing about being a new investor is that you probably have plenty of time on your side.
