The concept of saving for a rainy day has probably been around as long as humans have. Something deep inside us wants to prepare for an uncertain future by setting something aside — whether it’s extra food, a trunk full of gold or an emergency fund.
But saving effectively is harder than it sounds. Ideally, we want our savings to work hard for us. So, we try to invest wisely in the right mix of assets. But we often fall down on that task.
Here are some of the costliest mistakes investors make — and tips for avoiding them.
1. Not investing
The biggest mistake would-be investors and savers make is not investing at all.
Don’t wait for that raise, inheritance or lottery win. Start today, right now, with whatever you can. Consider this: If you can save $150 a month — that’s only about $5 a day — for 30 years and earn 10 percent on it, you’ll end up with around $350,000. That’s enough to change your life and the lives of those you love.
2. Investing before doing your homework
One mistake I’ve made when it comes to investing in risk-based assets like stocks is going on gut instinct and 20 minutes of internet research.
In college, I decided to start investing as a way to build my retirement. Good plan. But I invested in companies I knew and liked, rather than actually understanding them. Bad plan.
Don’t invest without a clue. If you’re thinking about stocks, there’s plenty of research and other information available online for free, not to mention in books at the library. There’s no reason to be uninformed.
3. Being impatient
In “The 10 Commandments of Wealth and Happiness,” Money Talks News founder Stacy Johnson offers this advice: Live like you’re going to die tomorrow, but invest like you’re going to live forever. He also offers an example of how patience pays:
The biggest winner in my IRA is Apple. I believe I bought it in 2002 or 2003 … Had I been listening to CNBC or some other outlet promoting constant trading, I almost certainly wouldn’t still own it.
In other words, don’t act rashly.
4. Not diversifying
Investing in stocks involves what’s known as market risk: If the entire market tanks, your stocks probably will as well. It also involves company risk — the risk that a specific company will do poorly.
It’s hard to eliminate market risk, but you can reduce company risk by investing in lots of companies, including firms of different sizes and companies in different sectors.
One easy way to get this type of diversification is to own mutual funds. A mutual fund allows you to own a slice of hundreds of companies.
5. Taking too much risk
Everybody wants to double their money overnight. But if you’re always swinging for the fences, you’re going to strike out often.
Some investments are little more than gambling — like stock options and commodities futures. These types of investments can work out for some experts, or those who are exceedingly lucky. But if they’re all you’re going to invest in, you’re really just gambling.
6. Not taking enough risk
On the other side of the same coin, some investors stand like deer in headlights, unwilling to take even a measured amount of risk. Instead, they keep their savings in insured bank accounts, earning peanuts in return.
Putting all of your money in insured accounts will guarantee that you never lose anything. But it will almost surely mean the purchasing power of your savings won’t keep pace with inflation. In other words, you’ll become poorer over time.