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6 Major Mistakes First-Time Investors Make

By: David Bach  |  Last Updated: October 21, 2020
Financial Expert & 10x New York Times Bestseller
IN THIS ARTICLE1. Investing without specific goals in mind
2. Not taking credit card debt seriously
3. Putting off saving for retirement
4. Waiting to buy a home
5. Trying to time or beat the market
6. Building a portfolio that’s not diversified

If you want to build lasting wealth, just saving money won’t cut it — you have to put your money to work. You have to invest it!

A few wrong moves though and you could derail your finances. Below, I rounded up six of the biggest (and most common) mistakes that first-time investors make. Keep these in mind if you’re new to investing. 

1. Investing without specific goals in mind

Becoming an investor before you have a clear idea of where you stand and where you want to go may well be the most common (and avoidable) mistake investors make. Before you put any of your money to work, you have to invest some of your time. 

First, I want you to have a solid understanding of your finances and where you stand. What’s your net worth? How much money do you earn? How much do you spend? Do you owe any debt? If so, how much? (By the way, if you’re in the red, I want you to get out before you start investing, but I’ll touch on that later.)

Next, think about your money goals. Do you want to buy a home? Invest in rental properties? Retire early? Whatever your goals are, write them down — the more specific the better! You can’t achieve a goal if you don’t have a clear understanding of what it is. 

Your goals will shape the way you invest your money. For example, money reserved for long-term goals can be invested more aggressively, since you have time to weather the ups and downs of the market. For short-term goals, you’ll want to be more conservative, since you’ll have less time to recover if your portfolio takes a hit.

Doing the organizational work upfront is not nearly as exciting as investing in a hot stock, but you can’t invest successfully without knowing where you are starting from and what your investment goals are. Only after you have figured out these things will you be able to evaluate all of your investment options and figure out which ones make the most sense for you.

2. Not taking credit card debt seriously

Credit card debt can be incredibly destructive and stressful. You can’t live rich if you’re living paycheck-to-paycheck or credit-card-payment to credit-card-payment. I want you to focus on getting out of the red before you start investing.

If you paid attention to the first mistake I highlighted above, you should know how much you owe and who you owe. Next, follow my six-step action plan to tackle your debt once and for all. Then, stay debt-free for life by following this simple principle: If you can’t pay for it in cash, don’t buy it. 

 

When you’re out of debt, focus on building up a sufficient emergency fund. Have at least three months’ worth of expenses set aside for a rainy day. Once you’ve accomplished that, you’re ready to invest your money.

3. Putting off saving for retirement

Retirement may seem too far off to start saving for, but the longer you wait, the further behind you’ll fall and the more you’ll need to save to reach your goals. 

The good news is, if you’re an employee and your company offers a 401(k) plan, it’s super simple to save for the future. Your contributions are automatically deducted from your paycheck — that means, once you sign up, you don’t have to do anything! The percentage of your income that you elect to contribute will be automatically taken out of your paycheck and put into your retirement account. You also get major tax breaks and, in some cases, employers will match a certain percentage of your contribution, which is essentially free money.

If you’re self-employed or your company doesn’t offer a 401(k) plan, you still have great options! IRAs (individual retirement accounts) also offer major tax breaks and anyone who earns an income can set one up at a bank, brokerage firm or online. Read my full guide to retirement savings accounts for more information.

The easiest way to save for retirement is to do it automatically. Have your monthly contribution either deducted directly from your paycheck or automatically transferred from your checking account to your retirement account every time your paycheck lands. You can’t spend what you never see.

4. Waiting to buy a home

Buying a home is one of the best investments you can make, yet more Americans are renting today than at any other point since 1965. Don’t wait to buy! 

Owning your own home is key to building wealth. How do I know? I’ve personally lived it. Plus, I’ve watched countless examples of readers of my books use the principles of homeownership to finish rich. But don’t just take my word for it: The median net worth of homeowners is more than 44 times the net worth of renters, according to The Federal Reserve’s most recent Survey of Consumer Finances. 

 

Now happens to be what I believe is the best opportunity to buy a new home or refinance your current home. Interest rates are at historic lows, making it more affordable than ever to own your home and use it to build wealth today. Because of this unique opportunity, I created a FREE First-Time Homebuyer Challenge to help you get into the game of real estate and build financial security. 

Keep in mind that the number one misconception that holds people back from buying a home is that they think they can’t afford a down payment. People often think they need to come up with thousands if not tens of thousands of dollars in cash in order to get a mortgage. This is simply not true. 

At the end of the day, having a lot of hard cash in the bank can certainly make things easier, but it’s definitely not a necessity. Take, for example, 27-year-old Hannah Addington: She bought her first home in Sacramento, CA with less than $6,000 in her checking account, thanks to a program called CalHFA, which helps first-time homebuyers in California buy with no down payment and minimal closing costs. She did it in seven days, start to finish, after picking up a copy of my book, “The Automatic Millionaire Homeowner.”

If you’re a renter, sit down and think about how you can become a homeowner sooner rather than later. Ultimately, you aren’t really in the game of building wealth until you get in the real estate game.

5. Trying to time or beat the market

It’s nearly impossible for the average investor to “beat the market” by picking stocks, so please don’t try. Rather, take Warren Buffett’s advice and invest in index funds, which allow you to take advantage of the success of major companies without the risks that come with buying individual stocks.

The bottom line: You will not succeed if you try to beat the market. What works is time in the market — not timing the market. 

History shows that the markets always recover. Stock market experience declines — which isn’t fun, but it’s normal — and there has never, ever been a declining market that has not ultimately recovered. If you pull your money out of the market during a downturn, you may miss the recovery. Remember, it pays to stay invested. It’s expensive to panic.

6. Building a portfolio that’s not diversified

The more diversified your portfolio — meaning, the more your money is spread around different asset categories — the better. Diversification helps reduce the impact of market volatility on your portfolio, and while it’s always important to have a diverse portfolio, it’s especially important during times of uncertainty like right now.

There are no shortcuts. The only sure way to get rich is to do so slowly, by building a well-diversified, rock-solid portfolio. As I noted earlier, you cannot time the market. Nor can you anticipate which sector of the market is going to be hot next week, next month or next year. Some people find this hard to accept. One of the worst things investors do is look at their portfolios at the end of a year and decide to sell stocks of theirs that didn’t go up and buy ones that did. History has shown that no asset class will always outperform every other asset class. Stay diversified.

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