Ramsey Brock: 3 Mistakes All Novice Investors Make (and How to Avoid Each One)
Investing is a powerful tool for building personal wealth and reaching long-term financial goals — but only if it is approached with the right strategy. All too often, novice investors end up losing significant amounts of money by making the same mistakes others have made in the past.
With this in mind, I recently had the opportunity to speak with Ramsey Brock, president of Brock Asset Management. During our conversation, he highlighted some of the most common mistakes novice investors make, as well as what can be done to avoid them so you can stay on track with your own financial goals.
1. Trying to Time the Market
One of the biggest mistakes Brock sees novice investors make is attempting to time the market. Whether they’re following headlines or got an “insider tip,” new investors think they can maximize their returns through frequent buying and selling. In reality, this usually has the exact opposite outcome.
“It’s nearly impossible to successfully time the market on a consistent basis,” Brock says. “All too often, trying to time the market stems from impatience — a desire to get rich quick. These decisions are also frequently emotionally based, which can cause investors to buy and sell at the wrong times. Jumping in and out of different market investments doesn’t just put you at greater risk of incurring losses from poor investment timing, but you’ll also lose money from frequent transaction fees.”
Instead, Brock advises that novice investors take more of a “set it and forget it” approach, in which they set up automatic transactions to buy additional stock on a regular basis (such as weekly or monthly). This takes emotion out of the equation by helping new investors treat their portfolio similarly to a savings account. Research has found that consistent and immediate investing, rather than attempting to time the market, delivers more profit to investors.
2. Investing Money You Can’t Afford to Lose
Another danger that Brock sees is new investors who invest money that they can’t afford to lose. This can include investors withdrawing funds from their emergency savings accounts, or even borrowing money so they can start investing.
“These mistakes occur because people think they need to have a significant amount of money before they invest in the stock market,” Brock explains. “In reality, you can start investing with as little as $100, or even less. Even when you are making sound investment decisions based on your understanding of the companies you invest in, there’s no guarantee you’ll get a return. There is always the possibility that you’ll lose your investment. If you borrow money to start your investment portfolio, this could quickly get you into trouble.”
For example, if a new investor borrowed money to invest in a stock, but that stock lost value, the investor could find themselves in a position where they don’t have enough money to pay off their loan.
One easy way to ensure that you invest money you can afford to lose is to simply set aside a small amount from each paycheck that will go toward your investing account. At the same time, be sure to continue putting money into your emergency savings account or using it to pay off debts. Reducing high-interest debt (such as credit card debt) is ultimately better for your immediate and long-term financial picture, and should not be neglected so you can invest.
3. Failure to Diversify
Another common mistake is failure to diversify. According to Brock, this can happen when new investors get intimidated by the prospect of researching so many different companies or mutual funds to invest in. However, when they limit their investments to just a few companies, they put their portfolio at greater risk.
“A balanced portfolio should avoid concentrating more than five to ten percent in a single investment,” Brock advises. “Even if you only invest in a few companies, you should try to diversify your portfolio across various sectors and industries. Exchange-traded funds and mutual fund portfolios can help you gain access to a broader range of investments so that major losses in one sector won’t wipe out your portfolio.”
He continues, “It may also be beneficial to invest some of your money in CDs or money market accounts. While they don’t typically see as high of returns as the stock market, they offer good returns and are a safe supplemental investment option that doesn’t risk potential loss.”
Invest Wisely
“There’s no way to completely eliminate risk from investing,” Brock explains, “but with a well-thought out strategy that focuses on making consistent investments across a diverse portfolio, you can greatly mitigate your risk. With a firm understanding of your risk tolerance and investment goals, you can make better-informed choices that keep you on track.”
With clear investment goals in place and an understanding of the positions they wish to invest in, novice investors can set themselves up for success by making consistent investments rather than worrying about timing the market, only investing what they can afford to lose and diversifying their portfolio. Regardless of the amount of money they have available to invest, novice investors who follow these principles can begin making an impact for good with their finances.