Once you’ve decided on your investment strategy and selected how you’d like to make your first investment, you’re ready to watch your asset base grow. As a new investor you should be warned that this part of the process can be quite uncomfortable.
Learning and planning is exhilarating. Everything is new and you’re excited to get started. Once you start putting your financial plan into action, however, you can only move as quickly as you earn money.
The first obstacle to sticking to your investment strategy is the speed at which you earn an income. Most of us are limited to a monthly salary, which is why significant growth will take time.
The second challenge is even harder, because we have no control over it. Once you invest your money, it’s at the mercy of the market.
Whether you chose your investments yourself, used a robo service or consulted with a financial advisor, all investments are exposed to the same market forces. We understand that investing takes time, but the reality of the markets can drive us crazy.
Here are the three most common mistakes investors make during this hurry-up-and-wait phase.
Mistake #1: Unrealistic expectations
As we discuss here, time is more important than money when it comes to investing. Unfortunately overnight success stories make for great entertainment. Most of us dream of that single investment that will help us reach our goals quickly.
In the short term, share prices go up and down due to market forces like supply and demand and economic and political factors that are beyond our individual control. Over time, markets make money, but it can be difficult to notice on a daily basis.
Watching the value of your investment go up and down by tiny amounts every day is likely to make you feel seasick and frustrated. It’s important to remind yourself of the power of compounding when you’re getting ready to give up on the whole endeavour.
Just like a grass doesn’t grow any faster when you watch it, your investments won’t benefit at all from your scrutiny.
As a new investor, you’ll be tempted to log into your investment platform at every available opportunity to see how your money is doing. This isn’t a problem, providing you can resist the urge to intervene on the days when the market isn’t doing well.
It’s tempting to think substituting poor-performing shares for ones that are doing well will make your portfolio grow faster.
However, share prices go up and down in the short term. It’s extremely unlikely that a share price will never be in the red, even if it was doing very well when you bought it.
Every time you sell a share you don’t like in favour of another, you are costing yourself money. You pay a fee for buying and selling shares.
If you only do it once, that fee becomes a very small part of your portfolio over time. However, you have to subtract that fee from your money every time you buy and sell a share. You have less money to invest every time, which means it will take longer for your money to grow.
Buying and selling shares also interferes with your money’s ability to compound. Holding on to a share will earn you dividends and allow time for the share price to increase.
Almost all new investors make these mistakes. It’s a normal part of the learning process, so don’t be too hard on yourself if you stumble.
The next part of your financial education is conquering your emotions. Here’s how:
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Remind yourself of your investment strategy. Write it down and keep it close when you look at your investments. It’s fun to hear stories of people who made millions overnight, but the vast majority of us need a few decades to build our fortune.
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Commit to sticking to your current strategy for at least a year. That means no selling. This will help you get used to watching your portfolio soar and dip.
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Revisit your entire strategy every year without touching your portfolio. Set an annual meeting with your financial advisor, choose a robo service that reviews your strategy every year or set some time aside to revisit some of the assumptions you made if you are going the DIY route.
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Ask a friend to keep you in line. Sometimes it helps having an investment buddy to keep you from making poor decisions. Think of your friend as your personal investment committee. Agree not to make any changes to your investments without the approval of your friend, but make sure you choose someone who can talk you off a ledge. This is not a job for the friend who supports you no matter what.
*Remember, when an investment is in the red, it doesn’t mean you’ve lost money. It only means the price of the share is lower than when you bought it. You only lose money if you sell the share at the lower price and even then, you don’t lose all your money unless the price of the share you bought went to 0.