6 Pitfalls That Every Beginner Investor Should Avoid

by Sean Bryant on March 30, 2017

Getting started in investing can be nerve wrecking, but it doesn’t have to be! If you know the pitfalls to avoid, you’ll have the ability to invest with confidence. That’s why today, we’re going to talk about the most common pitfalls beginner investors get sucked into so that you know exactly what to avoid.

Pitfall #1: Putting All Of Your Eggs In One Basket

The first big pitfall that a ton of beginner investors find themselves a victim of is putting all of their eggs in one basket so to speak. We’ve all heard the term, and it’s no more true in life than it is in investing. You see, while market trends make predicting the market somewhat possible, there will always be curve balls. By diversifying your investment, essentially spreading your money out across several different investment options, you’ll be sure that if one of them takes a dive for a short while, the profits from the others will help to ensure that the hit isn’t too big!

Pitfall #2: Forgetting To Consider Taxes

No matter where in the world you live, if you’re a citizen of the developed world, you are paying taxes. The government ultimately has their hand in every dollar we make, and that includes investing dollars. So, it’s important to keep in mind that you will have to pay taxes on your gains. There are some investment vehicles that act as tax havens as well, which help to lighten the load at the end of each year. It’s a good idea to look into these before you get started.

Pitfall #3: Poor Money Management (Investing More Than You Can Afford To Lose)

Any time you enter an investment, you should be comfortable throwing the money away. Well, not necessarily, it never feels good to throw money in the trash, but you get what I’m saying, prepare to lose your investing dollars. Honestly, it happens to the best of us. That’s why good money management is essential to investing. There are several loss exposure strategies that are designed to ensure that you never take a loss bigger than you can afford to. A simple search on Google for “Loss Exposure Strategies” will give you all the information you need to avoid this pitfall.

Pitfall #4: Investing Without Enough Research

In order to be successful in the world of investing, you’ll need to know what causes movement in the market, what strategies to use to capitalize on that movement, how to protect yourself from losses and more. All in all, it takes quite a bit of research in order to become successful, as with just about anything in life! So, never start investing until you’ve taken your time and researched anything you could think of pertaining to investing. In particular, all of the factors mentioned above are a great start!

Pitfall #5: Confusing Investing With Speculation

Investing is the process of taking your time to research the asset, believing that the asset is going to grow in value and purchasing that asset in one form or another. Unfortunately however, the line between investing and speculation has blurred thanks to the various investment vehicles out there today. By definition, speculation in the market is the process of trading high risk financial instruments in expectation of significant returns. While highly skilled analysts may be pretty good in the speculating game, it’s not a place for beginners. However, because these lines have been blurred, we see more and more beginners getting started, and losing their money. This has created a breeding ground for scams that look to take advantage of beginners hoping to make it big in the market. In particular, forex scams, binary scams, and pump and dump scams are becoming more and more popular. So, it’s worth taking a minute to get to know the difference between an investment and a speculative trade before you get started.

Pitfall #6: Investing Without A Plan

Finally, investing, as with most things in life, takes proper planning. Without a plan, your emotions will drive your decisions, and that’s never a good idea. Instead, it’s better to have an if this, then that take on investing. If the asset meets various criteria, you buy it, if not, you sell it. Through your research, you will learn what to look for. However, don’t think you’ll retain it all in the heat of the moment. Have a plan written out that you can revert to as you’re sitting at the trading desk!

Final Thoughts

If you take the time to do your research and avoid all of the pitfalls above, investing doesn’t have to invoke a nervous response. Instead, you’ll be able to invest comfortably, knowing that you’ll win some, you’ll lose some, but chances are, you’ll come out ahead in the end.

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Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.

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