Five rookie mistakes when you start investing

Photo of Rebecca Pritchard, Wealth Enhancers By Rebecca Pritchard, Wealth Enhancers

min read

Not investing early is the biggest mistake of all.

We all know that we need to invest in some capacity, yet very few are confident in where to start or how to manage their shares on an ongoing basis.

There are five common mistakes that rookie investors (or wannabe investors) are making. But the biggest mistake you can make is not to invest. Therefore, the first two mistakes below are dedicated to stalling tactics.

(Editor’s note: Rebecca Pritchard is presenting at the upcoming ASX Investor Day. Register your interest to attend the event here).

1. Waiting for all the stars to align

Whenever we do something new, we want to be well versed, confident (or at least confident in the friend who told us what to do). So, we research.

We may start trying to find the answers to our own questions, but then the research prompts more questions, more answers, more data, more confusion. We feel better informed and yet less certain about the path forward.

I strongly recommend to all my members and those in the community to upskill and get Googling – but to a point. The best way to learn is by doing, and there’s a massive difference between “shares” and “my shares”. If you start your investments off small, and learn as you go, you can ramp up when you are more confident and experienced.

If you are waiting for the perfect time to get started, it’s now.

2. I’ll invest when I’ve got more money

We often think that investing, in general or in specific assets, is something for rich people. “When I’ve got more money, I’m going to….”. The reality is that most rich people got into that position by investing. Which means we have got to start with what we’ve got.

The barriers of entry to get into the sharemarket are coming down every day and it is now easier than ever to get exposure without a lot of capital.

Whether you are investing through a fractional investment platform like Raiz that gets you started with $5, buying into an exchange-traded fund or picking your own stocks, you don’t need huge piles of cash to get started.

Most young people and those looking to get into the market for the first time do not have huge piles of cash. They might have some cash, but more often are thinking ahead to the cashflow that’s coming in. They don’t need to wait, and shouldn't, until it accumulates. Investing regularly over time is the way to go.

3. You are not diversified if you hold more than one type of bank stock

The ASX Australian Investor Study 2017 highlighted that the concept of diversification is poorly understood by many.

Diversification is not about holding thousands of assets, but spreading your portfolio across different asset classes (like cash, property, equities), sectors (industrial, financial, technology), geographical regions (Australia, Asia, US, emerging economies) and many other classifications.

We can also diversify the way we invest over time to ensure we are holding different investments that will service our needs for the short, medium, long and very long term.

If you currently hold one or several chunky assets (like property or businesses), it may take time to gradually build up a diversified portfolio. You can add in different investments over time to slowly rebalance yourself, reducing your exposure to certain areas (in downtimes) and gaining exposure to other areas (in upswings). This really highlights the importance of investing regularly over time, rather than in one big sweep.

4. Be honest about what you are trying to achieve

If you are investing for the medium and long term, you need to be prepared to commit to that. Short-term gains are super fun, but the flip side is short-term losses. If you have invested more than you can afford, and you were not realistic about the length of time your cash is going to be tied up, you might find yourself in a pickle.

We have all heard the expression “past performance is not a reliable indicator of future performance”. So, are you prepared for that?

If your investment strategy is aligned with your goals (and values), it is a lot easier to stay the journey. When we are aligned, we know what we are trying to achieve and why, and therefore are less likely to wander off course or get distracted by short-term volatility.

Every so often, you might be wanting to speculate on investments, and that is fine. But again, be honest about that and ensure you are only putting in what you are prepared to lose.

5. Don’t be a sheep

Whether investing in shares, property, fitness studios or baseball cards, the investing journey is relatively consistent. The image below shows the emotions investors tend to follow during investment cycles.

Next time you hear a colleague, friend or Uber driver talking about the next big “opportunity to invest”, take a moment to consider where that asset (and that person) is sitting on this cycle.

If they are raving to you about something, there is a very good chance they are somewhere between excitement and euphoria, which means this is likely to be the worst time to be investing.

Let us look at cryptocurrency for a moment. Last year it was the greatest thing since sliced bread and everyone wanted a piece (and prices were reflecting that). Now there’s fear, panic and uncertainty (and prices are reflecting that). Personally, I’m not interested in crypto as an investment, but if I was, I would be much more interested in it now than in 2017.

Purchasing equities through the sharemarket is generally a three-years-plus strategy and realistically something you should be doing throughout your life. This is where real gains and long-term wealth come from.

The market is volatile, and your investment will probably decrease in value several times while you are holding it, so you need to invest for several years to allow for recover and take you back into gain territory.

So what next?

If you know why you are investing, and what you can afford to invest now and into the future, the battle is almost won.

It is time to shake off the analysis paralysis and the pipedreams of short-term riches, and get your hands dirty. You can do this.

About the author

Rebecca Pritchard is a Gladiator at Wealth Enhancers, an award-winning Gen Y financial advisory firm.

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The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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