Whether we are talking about investing in the stock market, real estate, material objects, or something else, I'm sure all of us have heard a story about someone losing their money by making some sort of investing mistake.
While we all hope that we will never make the same mistake and lose some or all of our money, that's easier said than done.
No one wants to lose their money, possibly have to start all over with their investments, or risk their retirement because of a simple mistake.
While I am definitely not an investing expert (yet!) as you can tell from my recent post Why You Should Invest and Save For Retirement – Plus a Personal Finance Confession Fail (basically an investing 101 post), investment mistakes are something I want to try to avoid, especially if they are the easy ones.
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Below are five easy ways to lose money and become broke by making common investing mistakes:
1. Not being diversified is an investing mistake.
Not being diversified is a common mistake investors make. I have seen too many people take a large risk and have all their eggs in one basket. This can mean you are investing in just one company, using just one real estate investment to hold you over, only investing in material goods, and more.
This can be a disaster. If whatever you are investing in tanks, then your money goes down with it. It's a pretty big risk to take.
Diversifying your investments is always a good idea. Whether your investment is primarily in a fund (we like VTSAX) or you are in the stock market, real estate investing, and more, diversifying is something that most people will want to do.
2. Using another person's investing moves and exactly copying it is an investment mistake.
Okay, sometimes other successful investors have great ideas, don't get me wrong. However, that does not mean that if you just copy what someone has done in the past that it will work out perfectly for you and you will become rich.
If it were that easy, everyone would just be copying the exact buys of all the billionaires out there.
You have to think about timing, whether the other person just had pure luck, the current state of the economy and more. I have seen far too many people make huge investing mistakes by just completely copying what someone else has done in the past.
True story: I know someone who took out a large amount of money in the form of a bank loan, and invested the exact same way someone else did. Well, it turned out that he lost all of his money because the same factors were not in play when he made the same investment. So, he lost all of his money AND he has to pay interest on the loan.
Another reason this can be a mistake is if the person is just a scammer. They might be telling you to invest only so that they can make money. This leads to number four in this post which you should definitely read.
3. Pulling out whenever the stock market falls is a retirement mistake.
So many people make this investing 101 mistake. I remember when I was younger, a friend's parent told us that he withdrew his money almost whenever the stock market dropped even if it was just for a few days. This means that he was almost always selling low and buying high (a huge mistake!), which was costing him a lot of money.
Well, one year he ended up losing over $100,000 in a very short period because he panicked, and if he would have just left everything where it was, he probably would have been fine right now.
I remember him telling us that he took everything out because he thought that once you “lost money” in the stock market, that it was all just completely gone.
This leads to my next point…
4. Not doing your research when it comes to investing.
Okay, so some of the mistakes in this post might actually work for you, but you have to do your RESEARCH.
Investing without doing any research is a scary thing to think about. I'm not saying that everyone needs to be an investment expert, but at least learning about the fundamentals of investing can greatly help you.
You should earn and understand common investment terms, what different investments are, you should know what you are invested in, and so on in order to be more knowledgeable about where all of your money is.
An example: If you leave all of your investing to someone else, then you need to do your research on this person and make sure they know what they are doing. There are frauds out there!
5. Not investing at all is a common investment mistake.
If you skip out on investing entirely, then this can cause you to lose money and become broke.
I have heard from way too many people who have said that they are better off by keeping their money under their mattress or in a basic bank checking account, and it just makes me cringe. I made this mistake for far too long and I know I lost out on a decent amount of money.
By skipping out on investing, you are losing money due to inflation and the wonderfulness that is compounding.
What investment mistakes have you seen?
Do you know anyone who has lost major money by making an investing mistake?
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I have a friend who made a very good money because he has a stable job with a nice salary. When one of our friends asked him if he would love to invest, he immediately answered that he doesn’t have any plan when it comes to investing.
Why doesn’t he have a plan? What’s he doing with all of his money?!
I’ll admit to being one of the huge majority who thought investments were purely for those in big banks wearing suits. It’s only been relativly recently that I started doing the research and realised a monthyl passive investment into index funds takes minutes to setup and easy to understand.
The problem is that too many people still don’t believe investing to be accessible to the average person and so are losing money through inflation every day they retain their wealth as cash.
Good job on realizing this!
My mistake is that I followed someone’s strategy. But, what I found out that it should not be that way—someone’s strategy may not work for me. Thus, after that mistake, I took investing more seriously like getting an finance adviser, getting books, and reading articles on the internet. Making strategies more personal is I believe will go a long way.
Good job on realizing your mistake Jayson 🙂
Guilty of #3 on my first investing year 🙂 I’ve read about it before but experience is really the best teacher.
Yes, experience is a great teacher! I agree.
Over the years I’ve made a few investment mistakes. It’s pretty easy to do. Thankfully they’ve never cost a lot and I’ve learned from each one. One thing people forget when diversifying is that asset allocation is key as well. Diversifying your stock picks is good, but diversifying with various asset classes is much better.
Yes, definitely!
All great advice! #3 is hugely important not to do! We’re so glad we stayed invested all through the recession and downturn. We know so many people who pulled out and then, like you said, just had to turn around and buy high. It’s all about the long-term view for us–staying invested, not checking the market daily, and really not over-thinking it too much.
Yes, exactly. Too many people check every single day. Day to day prices usually shouldn’t matter too much as you most likely are not retiring tomorrow.
We are very boring investors- buy and hold! That’s all we do and it works great. I don’t like the ups and downs of it all, nor do I believe in my ability to time the market or anything like that. We choose to take the easiest path.
Same here!
Great article. I don’t have much money to invest but would love to start. Any suggestions on getting started? I am clueless!
Hello Sheila! I am not an investment professional, but I do have this post that is a beginner’s investing post. https://www.makingsenseofcents.com/2014/10/why-you-should-invest-and-save-for-retirement.html
I kept my life savings in CDs for years thinking I was doing a good job with my couple hundred dollars of interest a year. When I married my husband, he was horrified! Now we’re trying to make up for lost time, but I still lament my ignorance. Why didn’t I marry him sooner?! 🙂
Haha if only! 🙂
I think one of the biggest investing mistakes people making is investing when they have debt. If you are investing, you shouldn’t have any consumer debt or student loan debt. I think people want to be proactive and investing sounds fun, but really, it is something that you should do later, after you’re out of debt.
I agree, somewhat. I used to have a professor (he was actually my finance/investment professor ha!) who had a student loan interest rate of less than 2%, so he invested instead and only paid the minimum on his student loans. I think it all depends on if you know what you are doing or not.
I think it depends on the interest rates of your debt. I’d agree if it was high interest credit card debt. Though I do think that contributing to your 401k is investing and you should still contribute even while in debt especially if your employer matches. My student loan debt now has rates that range from 1.6% to 3.5% so my returns on investments exceed that. I think it’s important to get in the habit of investing early and the compounding really is magic. Just make sure to rules above.
I agree Andrew!
One big mistake I see all the time is not living in a way that enables you to have extra money to invest.
I agree Mark!
I think the copying one is huge and one lots of people fall prey to. It’s easy to copy someone else’s plan but generally if you are copying what worked really well for someone it’s not going to work as well for you.
I agree! If only more people realized.
I know number 5 really well. I have always invested but was at minimum levels for my first decade out of college. I figure I lost out on $100k because I was too afraid to invest. Now that I have maxed out for six years I see the mistake I made by not investing enough early on. You have to have some level of risk, but when you follow the five steps above you are really dealing with smart risk instead of the risk that loses you money. You also need to have a long-term approach so that you can take away the short-term risk of investing and expecting to be rich right away.
Ack that is a lot of money lost, but at least you know now!
We’re pretty boring investors here. Things should get more interesting when our mortgage is paid off. I think believing that there is no investment out there except low interest savings accounts so you should just spend your money is an issue I’ve come across…
Yes, we are boring investors as well. I’m fine with that though!
All excellent advice. Too many people invest in things that they don’t know and end up losing big. Or they invest their money in certain stocks because they heard the “hot tip.” Bad idea.
Thanks!
Since we’re paying debt off and not really into investing we do have an investment account for kiddo and quite honestly I know VERY little about it which scares the shit out of me.I need to look into it more but I don’t have time right now. I’m going to leave it and hopefully in a year or so look into learning more details…hows that for a mistake??
At least you started! 🙂
My biggest mistake is probably not getting started. But I don’t feel comfortable much right now while paying off debt. I am contributing a tiny amount to retirement.
Good job on multi-tasking! 🙂
Great post Michelle. Even as an investment analyst and advisor, I have made a couple of these mistakes myself once in a while.
I see too many people waiting to pay off their debt entirely before beginning a retirement investing plan. You may never pay off all your debt but you will grow old. Don’t wait to start investing and benefiting from compound returns.
Thanks Joseph!
Number 3 is important. Many people have gotten rich over the years by investing heavily when markets are down. I understand that this is a huge mental barrier for many people but the way I like to think that when stock prices go down, the stocks actually go on sale and you should load up on as much as possible.
Yes, exactly!