This article is a guest post written by Chris Girbes-Pierce, founder of Enlightened Wealth Management. Chris and I became friends after meeting at an industry conference and I asked him to write some thoughts on investing pitfalls as a guest topic for this site.
Many of the pitfalls of investing start before you even invest a dime, then continue afterwards, if left unchecked. Here’s how to beat the psychological barriers that prevent many people from carrying out a wise investment program.
You may not know this, but some of the reasons people fail at investing are totally avoidable, for the most part. That’s because they’re psychological reasons, which can be overcome with a little knowledge or some help from a financial advisor.
Since investing is part of most plans for financial success, you’ll want to read this and make sure you’re not falling victim to any of these common pitfalls. Here they are, followed by how to avoid them – can you identify any which you’re already experiencing?
Believing Myths From the Internet
Knowing how to invest means accumulating enough knowledge about the stock market, how investments work, and what type of investments are out there. How do people, in large part, access this knowledge? Mainly through the internet.
And just as you might imaging, there’s an awful lot of bad info out there! From ill-advised tips to advice-givers who are really just trying to sell something, to outright fraudsters, there are a million and a half ways to get the wrong idea from the internet about investing wisely.
Getting Investment Advice From Friends & Family
Your loved ones and your peers may care about you and may truly want to give you good advice about how to invest, but that doesn’t mean they know how you should invest your money.
Want to test that theory? Just ask a handful of friends and/or family how you should invest a theoretical windfall of $30,000. Chances are, you’ll get as many different answers as there are respondents to your informal survey!
Why does this happen? Because everyone is subject to misinformation, myths, crackpot theories, and reactionary responses to past experiences that have nothing to do with you.
Only a trained professional can analyze your particular financial situation and give objective advice that’s based on research, facts, and prevailing wisdom that’s been accumulated over the years by legions of financial professionals.
Feeling Overwhelmed and Giving Up
So, with the misinformation from the internet plus conflicting advice from those around you, it’s easy to understand why people often feel overwhelmed by all the investing choices, and the decisions they have to make in order just to get started.
But being overwhelmed shouldn’t stop you from dipping your toes into what could bring you some nice returns over the years. It’s no accident that most wealthy people are invested somehow! You should be a part of the investing world, too, even if you feel overwhelmed.
There are ways around that feeling, and hiring a financial advisor is the best one. Another way is to keep studying investing, and learn from the classic books written on the subject. Whatever you do, don’t let yourself give up.
Neglecting to Get Help When You Need It
Self-education and a do-it-yourself attitude are great things, but there comes a certain point where getting help is a wiser route to take. For some people, the DIY method will work, but they’re often the ones who either have way more time on their hands to study finance and investing, or who simply have a knack for this stuff.
For the rest of us, hiring a financial advisor is a good investment itself. They can not only advise you on how to invest, but how much and when. It may be wiser to pay off certain debts, for example, than starting your investment plan right away. There are several factors involved in making these types of important financial decisions, so having a professional at your side helps things immensely.
Failing to Understand that All Investments Come With Risks Attached
Nothing in life is a sure bet, especially investing. If you’re going to put money into the stock market, then keep in mind that there’s a chance, albeit remote, that you might lose every penny.
Of course it’s important to choose wise investments and spread them around so not all your eggs lie in one basket, but even the savviest and most prudent of investors could lose it all, in theory.
Therefore, always keep in mind that you shouldn’t put all your money into investing. Some even go so far as to warn not to invest any funds you could not stand to lose! That may be going a bit far, but it does point out the importance of investing in smart ways that minimize risk.
Failing to Recognize Large Upcoming Expenditures
If you’re going to need access to large amounts of cash in the near future for, let’s say a home purchase. If you invest your money, you may not be able to get it back out very easily or quickly for that major expenditure you face in the near future.
Keeping some cash reserves on hand, rather than tying everything up in investments that require time and sometimes a penalty to withdraw, means staying “liquid”. Keep this in mind, and keep some cash on hand for emergencies, too.
Not Knowing What’s Out There
Even if you do end up hiring a financial advisor to help you navigate the waters of investing, it’s still good to know your terms and your options. Take a look at reputable investing sites like Investopedia or even the knowledge centers on the website of reputable financial companies like Vanguard.
Knowing what a mutual fund is versus a stock, for example, will go a long way towards your understanding of what a financial advisor is going to do for you, since these are most likely some of the types of investments they’ll setting up for you.
Not Knowing Your Own Investing Personality
One of the first things a financial advisor or even a robo advisor will ask you is how you feel about risk. Our aversion to risk is a major determining factor in how our investment portfolios are set up.
How much anxiety you feel over your investments is one way to gauge this, so ask yourself how you’ll feel after investing, if you watch the daily ups and downs of your holdings. If you understand that investing is for the long term, this shouldn’t bother you at all.
About the author: Christopher Girbés-Pierce CFP® is the Founder of Enlightened Wealth Management, a fee-only wealth management firm located in Santa Monica, CA. EWM specializes in providing comprehensive financial life planning services for clients who wish to align their financial resources with their goals and values.