When it comes to learning anything new, making mistakes is part of the learning process. But mistakes in investing can be costly (and end up hurting long-term returns) if you don’t learn from them as soon as possible.
We asked seasoned Hatch investors about some of the biggest lessons they’ve learned early in their investing journeys so you can avoid them.
#5. Following the herd
People who lack individual decision-making or analysis and follow those around them blindly have what they call a herd mentality. For some, investing can be a quick-paced pursuit, but FOMO (fear of missing out) and the blatant ignoring of company fundamentals can be hugely detrimental to returns. Buying into the latest fads and not relying on company performance has proven disastrous – dot-com bubble, we’re looking at you. Some of our more seasoned investors haven’t forgotten either. Investors who follow the herd tend to be overly-optimistic about a share’s price increase and have a severe fear of being left behind as others realise huge gains. Irrational investing pushes share prices into overvalued price territory. We know what happens next: pop goes the bubble. Many Hatch investors are looking to buy shares in solid, “boring” businesses – the ones that, over time, they hope will reward them through share price appreciation, dividends, or share repurchases.
Tip: Do your research and trust your analysis.
#4. Not doing the research
Researching shares can be intimidating when you're new to the process. There's a lot of financial information out there on the internet, and it's not always clear. However, it's not as difficult as it seems. Reading an annual report can be the key to understanding the value of a company. They detail a company's activities and financial performance, making it an excellent place to start when you’re considering investing. Taking the time to read them can help you learn what's going on within a company, and most are freely available on their websites.
But don’t stop there. Seasoned investors look at how other companies in the same industry are working. Get googling and read analyst reports to compare. A few resources that Hatch investors use to further their understanding include The Balance, The Motley Fool, and the classic, Investopedia. Closer to home at Kiwi Wealth, we’ve developed an Investor 101 video series, and our Hatch blog has some great information too.
Tip: Invest in your financial literacy.
#3. Active trading
When investors buy and sell shares quickly and regularly, rather than letting investments sit tight and play the long game, they’re active trading. Some investors rely on luck (instead of research, knowledge and smarts) and invest their money when a share is on the rise, only to pull it out when the share is plummeting. But trying to ‘time’ the market is not the best strategy. Investors who’ve been around the block know that you can’t beat the market this way.
There are a few reasons why active trading isn’t the way to get started in investing. First of all, active trading takes a lot of time and energy. Secondly, it can up your investment costs, brokerage and other expenses. Lastly, active trading increases your chances of buying and selling at the wrong time. We know investors who are guilty of relying on luck (instead of research, knowledge and smarts) and invest their money when a share is on the rise, and pull it out when the share is plummeting. It’s not the best strategy. The market is volatile, so there’s a reason to let your money ride the wave. Over time, the peaks should outweigh the valleys.
Tip: Develop a plan and take a long-term approach.
#2. Guided by emotions
The most common answers we received from Hatch investors when we asked them about their biggest investing mistakes were watching results every day and panic selling. We weren’t all that surprised – investors are humans first! When it comes to investing, we can be our own worst enemies. Many investment losses come from a mixture of impatience and impulsiveness - - two very human conditions. Emotional factors like fear, greed, and overconfidence can wreak havoc on our portfolios. Investing might be the only time where it can pay to be lazy. Seriously. Don’t fixate on the day-to-day movements in share prices. Let the market ride and stick to your guns.
Tip: Ignore short-term market fluctuations.
#1. Not starting sooner
Ah, the number one investing mistake. If only we had a dollar for every time we heard this one! Time, as we know, is key to letting your money grow over the long term. The cold hard fact of the matter is that it’s always better to invest sooner rather than later. Yes, prices of individual shares will rise and fall daily, but over time, share markets tend to rise in value. If we all know that time is a factor in growing our wealth, why are we always trying to time the market, or waiting for the ideal time to invest? Well, a lot of us think that retirement is a long, long time away. We’re often concerned with the now, rather than the future. But if you start making investing a habit, You can future-proof your finances. You don’t have to invest thousands – starting with a little bit here, and a little bit there – these investments will add up and see you through your retirement, which is probably coming sooner than you think!