Since investing and personal finance are topics never formally taught in school (both high school and college) many millennials are not quite sure where to start when it comes to investing their money. According to a survey by Investopedia, only 37% of affluent millennials feel knowledgeable about investing. Since investing plays a critical role in building wealth and financial security, this presents a very big problem.
To help address this, we wanted to highlight some of the most common mistakes that millennial investors make. This way, you can avoid some of the pitfalls that other people have made and feel more secure in your financial choices.
These are the top 5 investing mistakes that millennials make (and how you can avoid them).
Lots of people, especially when just getting started, think that the main point behind investing is to pick stocks that they think will be winners and pour tons of money into them. Part of the reason this is so popular is because winning money quickly releases dopamine into your body. It is the same reason that gambling can be so addictive.
Here are a few examples of situations that may have seemed like home runs but turned out to be the opposite:
While you should definitely be identifying opportunities that you think will be successful, it is incredibly risky to put big chunks of your money into one or two stocks.
Trying to pick stocks is like trying to make a living betting on horse races. Sure, there are lots of factors you can look at to determine which horse might be a winner. But at the end of the day, this is a very unreliable way to make money.
Instead, you can save yourself a lot of time and make a lot more money by just investing in index funds. Index funds track the overall return of the market and take the guesswork out of it. You can still try to pick a winner here and there but investing in indexes is a more proven way to build wealth.
This mistake can be incredibly difficult to override. Human beings are not computers and almost everyone can sometimes make a decision based on their feelings instead of logic. When it comes to investing, this might look like one of these scenarios:
For all of these events, hindsight is 20/20. By this, we mean that usually, a hasty decision to invest will end up costing you money in the long run. However, at the time it might feel like the most obvious choice. “The stock is up 40% already this month, it is definitely going to keep surging!”
Instead, try your hardest to not make financial decisions based on emotions. As a good rule of thumb, if you think an investment is a good idea you should be able to wait at least a month before taking action. Investments that are actually good decisions should still be a good decision a few weeks from now.
This brings us to another common investing mistake.
As legendary investor Peter Lynch said, “More money has been lost trying to time market corrections than has been lost in the corrections themselves.” A market correction is a short-lived decline in the stock market, usually of about 10%. Corrections are fairly common and usually, there is no obvious reason for why they happen. Additionally, because they are short-lived, they should not be a huge cause for concern. Corrections are very different from recessions or depressions.
It is also impossible to tell when a correction will come. However, that does not stop some investors from panicking every few months and selling off their investments.
Instead, accept that your money is invested for the long-term and trust that all short term losses will eventually be recovered.
With the popularity of apps like Robinhood, it has gotten much easier for average people to open up an account with no minimum balance and invest for free. “Start investing for as little as $5.” has become a very popular slogan.
Instead of falling into a mentality of just following what everyone seems to be talking about on social media, try to look at other places to get your information. Read a few books on investing from accredited authors and make your own decisions, even if it means going against the crowd.
Despite all of these investing mistakes that millennials make, the #1 mistake is actually not taking action. Since it can be tough to know where to get started with investing, most millennials suffer from decision overload and instead choose to take any action with their investments. Even if you make one of the mistakes above (emotionally sell a falling stock or get burned on a “sure-fire” investment) it is still better than doing nothing at all.
Some “aspiring investors” are constantly talking about getting started but never seem to actually make any progress.
At the end of the day, action is the most important step in the investing process. It is completely fine to make a few mistakes. This is what will allow you to learn and the next time you can avoid making the same mistake. However, without the decision to take action, you will never get to learn from your mistakes.
We are now slowly rolling out our beta program. Be one of the first to get access by signing up today.Request Access