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5 mistakes too many new investors make

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We asked financial experts for the most common mistakes beginning investors make and how they can avoid them.

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Mistakes happen, but when they cost you money, it can be upsetting, especially when those mistakes have a lasting impact on your finances. So whether you’re going at investing on your own — or considering hiring a financial adviser to help you (you can use this tool to get matched with a financial adviser)— we asked financial experts for the most common mistakes beginning investors make and how they can avoid them.

Mistake 1: They hoard cash

Certified financial planner Charles Weeks says many people are cash hoarders. “For these people, there is never enough cash in the savings accounts, and some are even willing to keep balances on high-interest credit cards just to avoid seeing their cash balances drop. Inflation, the silent killer, can wreak havoc on cash hoarders as you can be losing money on your cash hoard every day,” says Weeks.

This issue can be particularly acute now: The U.S. rate of inflation hit 7.9% in February, remaining at a 40-year-high; meanwhile, even high-yield savings accounts typically aren’t paying much more than 0.5%. So while you do need an emergency fund of roughly 3-9 months of expenses in savings, pros say you may want to invest the rest.

Looking for a financial adviser? You can get matched with a financial adviser who may meet your needs via this SmartAsset tool.

Mistake 2: They take advice at face value

Many inexperienced investors tend not to check on the validity of the information they’re being told, and may take things at face value, says Luis Strohmeier, certified financial planner at Octavia Wealth Management. “Whether advice comes from the media or financial advisers, I encourage individual investors to ask questions about the things they don’t understand. If your adviser recommends you invest in an ETF and you’re not sure what that is, ask them,” says Strohmeier.

Mistake 3: They chase hot stocks

A common mistake beginning investors make is attempting to chase hot stocks instead of putting together a diversified portfolio that includes a variety of stocks, bonds and cash. “They may not realize the importance of holistic financial planning,” says Tiffany Lam-Balfour, investing spokesperson at NerdWallet, which means that one takes into account all aspects of someone’s financial plan including retirement planning, college planning, insurance planning, estate planning, budgeting, and more. Here’s how to create a diversified portfolio.

Looking for a financial adviser? You can get matched with a financial adviser who may meet your needs via this SmartAsset tool.

Mistake 4: They wait too long to start investing

One of your biggest advantages as an investor is time. “The power of compounding means that even a little bit invested early can yield big results. That said, try to invest as much as possible. So many people save their money in the bank rather than investing it. With inflation and current interest rates, your money is actually losing value. Make it work harder by investing it,” says Ismat Mangla, executive editor and content director at MagnifyMoney. 

If two people, age 25 and age 35, both save $100 a month at a 5% annual compound rate of return, the person who started saving at 25 will have upwards of $140,000 by the time they turn 65 versus the person who started at 35 who will only have about $80,000.

Mistake 5: They pay too much in fees

Mangla says investors often spend too much money on fees, which can have a huge effect on the returns in your portfolio over the long run. For example, if you have an investment account worth $50,000 and you hold the investment for 25 years, earning 7% per year and paying 0.50% in annual fees, at the end of the 25 years, you’ll have made about $190,000. If you’re paying a 2% fee on the same numbers, you’ll lose about $76,000 to fees. “Look for low-cost index funds and ETFs, and when working with a financial advisor or robo-adviser, make sure you are minimizing fees as much as possible,” says Mangla.

Looking for a financial adviser? You can get matched with a financial adviser who may meet your needs via this SmartAsset tool.

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