Ever since the celebrations at the beginning of the new millennium, investors have had to deal with turbulent markets. For young investors just getting started with managing their money and trying to make it grow, the experience of the Lost Decade of stagnant stock-market returns and the 2008 recession's impact on the entry-level job market have combined to make it even harder for those just beginning their careers to get employed at all -- let alone get a good enough job to be able to invest.
Despite those negative experiences, young investors can't afford to make the mistakes that have become increasingly common in recent years. Let's take a closer look at four mistakes that young investors are making and what you can do to avoid them.
Mistake 1: Being afraid of the stock market.
Since 2000, investors have seen two major bear markets, with very different but equally scary causes and consequences. Early in the decade, the bursting of the tech bubble and the impact of September 11th gave many investors their first experience with a down market after the long and mostly uninterrupted bull market of the 1980s and 1990s. Later, just as investors were starting to get their feet back under them and the market marched to new highs, the financial crisis reared its ugly head and once again sent stocks crashing.
Despite the amazing bull market that has led to major market indexes more than doubling, we've only recently gotten back to record highs. Moreover, skeptics point to fallen stocks AIG (NYSE:AIG) and Citigroup (NYSE:C), whose share prices remain 80% to 95% below where they were five years ago, as evidence that even some companies that survived the crisis will never return to their former glory.
Despite these concerns, young investors have to incorporate their limited experience in the past 13 years with the bull markets of past decades to come to a synthesis. Stocks won't always be as strong as they were in the 1980s and 1990s, but they won't always be as weak as they've been more recently, either. A happy medium will provide ample positive returns to help brave young investors reach their financial goals in the long run.
Mistake 2: Not starting to invest early enough.
Young investors have one thing older investors wish they had more of: time. The sooner you start investing, the less you have to save to succeed.
It's tempting to think that since you can't afford to save much, it's not worth starting at all. But every little bit does get you closer to your goals, and it's easier than ever to put even tiny amounts of money to work in the market. Getting into the savings habit rather than waiting will serve you well in the long run.
Mistake 3: Thinking too much about short-term results.
The worst thing that can happen to young investors is for the stocks they buy to fall. Four years ago, countless investors raced out of the market as it crashed, only to find that they locked in losses that would only have been temporary if they'd ridden out the downturn.
You can see a great example of this phenomenon in Europe, where oil companies Total (NYSE:TOT) and Statoil (NYSE:EQNR) have underperformed their U.S. counterparts due solely to short-term concerns linked to where their headquarters are. If you sell based on those short-term results, you'll miss out on gains when the market realizes that these European energy giants have prospects around the world -- just like their better-performing peers elsewhere. If your investing thesis is still valid, stick with it.
Mistake 4: Going for the big kill.
When you have limited money to invest, it's tempting to put it all on a single stock and hope for the best. But doing that not only exposes you to huge risk, it also leaves you with a limited learning experience for your efforts.
By contrast, diversifying might dilute your total returns, but it makes them more secure and sustainable. Even more important, it gives you broader exposure to what's going on in the investing world, training you in a variety of important concepts that will have an impact on your investments for decades to come.
You can do it!
Millions of young investors are convinced that the stock market is rigged against them. But staying away from stocks out of fear won't solve any of their financial problems. Conquering your fear and finding lucrative ways to profit from your investments is the best chance you have to define your financial life in the way you want.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.