6 Investing Mistakes Young People Make
Do you feel like you need to have "extra" money before saving for retirement? Or that you'd rather invest in specific companies instead of broad index funds? Those are just two common mistakes that young people make when they start thinking about putting money into the stock market. Here are six common errors, and how to avoid them:
Getting excited about single stocks.When
Investing in your favorite company may seem more glamorous than putting money into an index fund that reflects a broad segment of the market, but it's a far riskier choice, since single companies can suddenly go under or plunge in value. Aside from being diversified, index funds carry the added benefit of having low fees since they're passively managed, which means they don't rely on a person to research and select stocks. Today, Roth puts his money in index funds, including bond, stock, and real estate funds.
Thinking investing is for rich people.Waiting until you have "extra" money to invest probably means you'll be waiting forever. Instead, consider starting by contributing small amounts to your retirement account and slowly raising the percentage over time. The benefit of starting early is big: If you put
Forgetting to check up on expenses.Expenses can take a big chunk out of your investment return. But fees vary widely, typically from 0.1 to 2 percent of your total investment on an annual basis. Think tank RAND calculates that even just 1 percentage point difference in annual fees adds up to
And that's another reason to invest in index funds instead of more tailored mutual funds: Because fees automatically reduce investor returns, they are a primary reason research suggests that passively managed index funds perform better for investors than do actively managed mutual funds.
Keeping close track of the market's highs and lows. If your investment portfolio is well diversified and you check in on it once every few months to see if it needs to be rebalanced, there's no need to follow daily fluctuations. Instead of keeping an eye on the cable news channels, which can make every dip feel like a crash, focus on your hobbies, relationships, and other sources of stability. If you still feel anxious about the market's movements, maybe your investments are too risky and you'd be better off putting a greater percentage of your portfolio into relatively safe (and lower yielding) money market funds.
Forgetting to diversify.Diversification -- in market sectors, industries, and specific companies -- reduces your chances of losing everything. One of the easiest ways to do that while investing in the stock market is through index funds, which mirror a specific market index such as the
Letting an advisor -- or your parents -- invest for you.There's only one way to learn, and it's by making mistakes, as Roth did. If you enjoy checking up on your accounts regularly and plugging numbers into spreadsheets, you can probably manage your own money. Some people prefer to rely on professionals, and that's fine too, as long as you still play an active role. Most good advisors recommend understanding exactly where you're putting your money and not just trusting someone to make the right decisions for you.
This article is adapted with permission from
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