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One of the most effective ways to get rich is to invest your money.
The good news is, you don’t have to be an expert to invest – but there are a few basics everyone should understand before putting your money to work. Even if you think you know what you’re doing, we tend to think we’re better investors than we actually are … and overconfidence can be detrimental.
If the following nine red flags ring true, you might not be as good at investing as you think:
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You think short term
Just like in virtually every other aspect of personal finance, you don’t want to rely on investing to “get rich quick.”
It’s a long term game, and one of the best things you can do for your investments is leave them alone. As certified financial planner Shelly-Ann Eweka advises, “Avoid impulsively selling an underperforming investment and stay the course with a diversified portfolio that is able to withstand inevitable short-term rises and dips in the market.”
Legendary investor Warren Buffett sums it up nicely: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
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You set and forget your investments
Yes, you should keep your hands off your money … to a point.
Life happens, and there are times – particularly big life changes – when it’s smart to review your investments and make financial adjustments.
For example, if you decide to retire early, you’ll need to readjust your time horizon and the amount of risk you choose to take in your portfolio. As your money grows, and as you get closer to the end of your time horizon, the original portfolio you created may no longer suit your needs.
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You don’t know how taxes affect your returns
The US government doesn’t let you have the money you may make investing for free – when you cash in, you’ll owe what’s called capital gains taxes. Some withdrawals, like those from retirement accounts in some cases, can be taxed as income.
Various factors affect how much you’ll have to pay, such as how long you’ve owned the asset. You’ll pay a higher capital gains tax rate on investments you’ve owned for a shorter amount of time. (There’s another reason to invest for the long term.)
“Taxes can greatly impact your investments – both while you are working and in retirement,” Eweka explained to Business Insider. “If you are working and have many years until you need to access your money, your taxes and strategy are a lot different than when you are retired and pay taxes as you withdraw money from the returns generated within a workplace retirement plan such as a 403(b) or 401(k).”
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You try to time your investments
People have a tendency to “shun the market when it’s getting drubbed and venture back only after it has recovered,” financial journalist Andrew Tobias explains in the updated version of his 1978 investing classic, “The Only Investment Guide You’ll Ever Need.”
However, “It is precisely when the market looks worst that the opportunities are best; precisely when things are good again that the opportunities are slimmest and the risks greatest.”
In short: Don’t get overly excited when the market is judged to be healthy, and remember that bad things aren’t obvious when times are good. As Buffett likes to say, “You only find out who is swimming naked when the tide goes out.”
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You fall for the stocks that ‘everyone’ likes
“Beware high-fliers and the stocks that ‘everyone’ likes, even though they may be the stocks of outstanding companies,” Tobias warns in “The Only Investment Guide You’ll Ever Need.” “Even if the growth comes in on schedule, the stocks may not go up. They’re already up. Should earnings not continue to grow as expected, such stocks can collapse, even though the underlying company may remain sound.”
On the flip side, don’t buy a stock just because everybody hates it.
As Buffett notes, “A contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling. Unfortunately, Bertrand Russell’s observation about life in general applies with unusual force in the financial world: ‘Most men would rather die than think. Many do.'”
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You check your investments every day
Investing gets emotional. Oftentimes, our choices are clouded by fear, greed, and nervousness, which can ultimately wreck even the most sound investment portfolio – and it doesn’t help that you can see how you’re doing throughout the day.
Unless it’s part of your job, avoid the temptation to check a stock ticker or your account on a daily or weekly basis. Markets go up and down every day, and so do individual stocks – you don’t need the anxiety of constant updates.
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You ignore fees
Investing isn’t free, but you can minimize the fees you pay, which is a crucial component of successful investing.
As John C. Bogle, founder and former CEO of the Vanguard Mutual Fund Group writes in “The Little Book of Common Sense Investing,” “If investors could rely on only a single factor to select future superior performers and to avoid future inferior performers, it would be fund costs.”
Bogle and Buffett recommend investing in low-cost index funds, a type of mutual fund that is broadly diversified and operates with minimal expenses. “All index funds are not created equal,” Bogle notes, so you’ll want to research things like the fund’s expense ratio and the minimum investment required by searching them on in the “quote” field on Morningstar.
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You put all your money in one place
Diversification is important, which means spreading your money out among different kinds of investments.
While there are a lot of opinions out there about how diversified an investment portfolio needs to be, most everyone agrees that putting all of your financial eggs in one basket is a recipe for disaster.
Plus, much of the market’s gain has come from a small number of “big winners,” such as Microsoft and Intel, Tobias writes: “So you could attempt to find these stocks to the exclusion of the rest of the market … but probably miss them. Or you could be content to buy very broad index funds that, while they’ll perform only ‘average,’ will almost surely include these great stocks in their average.”
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You assume you can make up lost ground by investing more later on
For nearly every type of investing – including retirement savings – nothing can make up for the effect of compound interest. In your 20s especially, your biggest asset is time, and the longer you wait to put your money to work, the more you miss out on the benefits of compounding.
That being said, “it’s too late to start investing” is not a good excuse to keep your money under the mattress. It’s still better to start late than never – as long as you aren’t tempted into taking unnecessarily high risks to make up for lost time.