Both short- and long-term investments can be effective ways to build wealth — but, like anything else, investing comes with some level of risk. That’s why you need to consider not only your own risk tolerance, but also your current financial situation and overarching goals before you get started. It’s also important to have a strategy in place before putting your money toward different investment vehicles.
Unfortunately, many people aren’t as prepared for the highs and lows of investing as they’d like to be. In many cases, individual investors also end up making mistakes that not only impact their current financial situation but can potentially prevent them from becoming rich.
If you’re thinking about investing, here are some mistakes that could impact your long-term financial well-being.
Not Having an Investment Strategy or Plan
Even if you don’t have an investment portfolio yet, it’s still important to create a detailed plan that clearly outlines your goals and strategy. Without this, you could risk failing before you truly get started.
“To ensure a successful investment path, it is essential to first clarify your investment goals and define your objectives,” said Sigita Kotlere, CEO at Nectaro. “I know, you may think that you are just starting small and it is not necessary to define a specific goal, but goals lead to achievements. [Assess] your risk tolerance early on to align with your goals and understand your risk appetite during market fluctuations.”
Take some time to come up with a solid financial plan that you can realistically follow. This is especially important if you’re nearing retirement and are trying to adjust your investment strategy accordingly.
“Coming up [with] and staying on top of an executable financial plan is critical when getting close to retirement or during retirement,” said Adam Schwery, financial advisor at COUNTRY Trust Bank. “A financial plan is not something that you set and forget. It’s a living, breathing plan that needs to adjust as your goals do, as well as outside factors [that] influence your goals, like taxes, your health, the economy, etc.”
Not Understanding Tax Implications
Some people avoid investing because they don’t fully understand the tax consequences of doing so, or because they’re afraid of being taxed.
“People are afraid to invest because they are worried that if they need the money, they will have to pay tax on it. The best suggestion is to know the taxes and the numbers,” said Gina Knox, CEO at Gina Knox Coaching. “Remember, capital gains tax is only on the money that you earned, not all of your money. Also, you can reduce this tax by leaving your investment in for over a year.”
Other people still will invest without knowing the tax implications, something that can cut into their gains. That’s why it’s a good idea to consider the types of investments you’re making and how they’re taxed.
“Educate yourself on personal finance, investment strategies and wealth-building principles,” said Kelly Ann Winget, founder and manager of Alternative Wealth Partners. “Empowered with knowledge, you’ll make savvy financial decisions and adapt to changing economic conditions. By keeping your finger on the pulse of the economy and financial markets and staying informed about global trends, geopolitical events and technological advancements, you’ll be armed with knowledge that may influence your investment decisions.”
Succumbing to Inaction
Investing can seem complicated, especially if you’re dealing with active investment vehicles. But a big mistake people make is failing to take active roles in their own investment portfolios.
“Another common mistake is succumbing to investment paralysis, which happens when individuals fail to make necessary adjustments or decisions as their financial goals or lifestyle evolve,” Winget said. “While investors acknowledge the importance of diversification or risk management, many hesitate to take action.”
Refusing To Take Risks
Investing involves risk. After all, there are no guarantees that you’ll see the returns you want. Because of this, many people avoid taking risks or end up taking too few risks. However, this can end up hurting you financially.
“Individuals need to be taught to invest to build wealth and not to save to build wealth,” said Dr. Robert R. Johnson, professor of finance at the Heider College of Business at Creighton University. “The surest way to build true long-term wealth for retirement is to invest in the stock market. Mistakes begin early in life and the biggest financial mistake people make is taking too little risk, not too much risk.
“There is an old Wall Street adage that states, ‘You can sleep well or eat well,'” Johnson added. “You will sleep well if you commit funds to low-risk investments like money market funds or Treasury bills, but your investments will not grow substantially and may even have trouble keeping pace with inflation. You will eat well by consistently investing in stocks.”
Investing Primarily in Innovation
Investing in innovation — like a startup or cryptocurrency — isn’t necessarily a bad thing, but it can lead to disappointing returns.
“People believe that identifying a new trend and investing in it early is a path to riches,” Johnson said. “Simply put, investors in innovation are often disappointed. For instance, many people today are speculating in crypto. Crypto has no intrinsic value and its appeal is related to its disruption potential.”
Instead of investing in innovation, Johnson suggested following the KISS strategy — that is, “keep it simple, stupid.”
“People should invest in a low-fee, diversified equity index fund and continue to invest consistently whether the market is up, down or sideways,” he said. “People should not try to beat the market; instead, they should invest in the market. Dollar-cost averaging into an index mutual fund or ETF is a terrific lifelong strategy. Dollar-cost averaging is a simple technique that entails investing a fixed amount of money in the same fund or stock at regular intervals over a long period of time.”
Not Maxing Out Your Retirement Contributions
Retirement accounts, like a 401(k) or an IRA, are a significant investment opportunity, one that often gets overlooked. Even people who have employer-sponsored retirement plans often miss out on matching contributions, something that can cut into their potential growth.
“Perhaps the worst financial mistake anyone can make is turning down free money,” Johnson said. “If one does not contribute enough in a 401(k) plan that has a company match to earn that match, one is basically turning down free money. Many people put such a high priority on paying down debt that they do not participate in their company 401(k) plan.”
Along with this, maxing out your retirement plan can lower your annual tax bill.
Investing Too Much in Residential Real Estate
Purchasing residential real estate could lead to great gains, but it’s also a risky and potentially expensive investment. For those who do invest in residential property, a major misstep is not paying attention to the true cost of homeownership.
“The biggest mistake any homeowner can make is failing to keep track of the true costs of homeownership and home remodels and improvements, which are arguably the hardest to budget and contain — and failing to capitalize on the equity in their homes,” said John Bodrozic, co-founder of HomeZada.
“Since home ownership and maximizing the value of what, for most, is their single largest asset has become increasingly complicated, don’t go it alone,” Bodrozic said. “There are a number of digital home management platforms and apps on the market that will allow you to track mortgage, utility, insurance, property tax, maintenance and repair costs.”
At the same time, some people put too much money into their homes, which can keep them from building wealth.
“They overinvest in a home,” Johnson said. “I put ‘invest’ in parentheses, because historically residential real estate has been a relatively poor-performing investment. Overextending and buying a large home is a losing strategy. Larger homes have greater initial costs and greater ongoing costs (maintenance, property taxes, etc.) than smaller, starter homes. People would be much better off by renting or buying a smaller home and investing those savings in financial assets for the long run.”
Relying on Short-term, Quick-Growth Options
Last but not least, many individuals end up making their investment decisions based on the promise of immediate gains, something that often doesn’t pay out.
“One of the most common mistakes people make when investing is harboring expectations of short-term surge growth,” said Collin Plume, founder and CEO of Noble Gold Investments. “Many anticipate another surge akin to Bitcoin or presume one of their penny stocks will suddenly escalate to $10. While such occurrences are not impossible, they are largely the exception rather than the rule.
“It is pivotal to cease searching for assets that can miraculously turn you into a millionaire within a year or two. Achieving financial security is more a marathon than a sprint.”
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