Most new investors sabotage their own success before they even get started—not through bad luck, but through predictable mistakes that you can easily avoid. Whether it’s jumping into hot stock tips without research, putting off investing because retirement seems too far away, or forgetting that taxes and fees can silently erode your returns, these common pitfalls can cost you thousands of dollars and years of potential growth.
Below, we'll help you sidestep these traps.
Key Takeaways
- Make sure you identify your goals, timelines, and risk tolerance before investing so you avoid emotional decisions that hurt your returns.
- A key mistake many make is not diversifying by putting their money into just a few stocks or other assets.
- Newer investors often overlook expenses and taxes that’ll become due later, which can cut their returns.
1. Not Actually Investing
If you invest through a retirement plan at your workplace, your contributions are automatically invested. However, many people hesitate to get started and put it off, leaving their money in savings accounts that yield little in interest.
“You need to pick the investments,” Dinon Hughes, a certified financial planner (CFP) and partner at Nvest Financial, told Investopedia. Otherwise, your money probably will sit in cash, earning little. “I’ve seen this more times than I’d care to share,” he said.
Especially when you’re young, retirement is far off, and you’re juggling other expenses, it can be easy to put off saving and investing. However, “a small amount makes a big difference long term,” said Jack Heintzelman, director of wealth management at Boston Wealth Strategies.
Tip
You can’t sidestep your emotions entirely, so many investors create systems that help them keep their investing decisions more rational when the markets get volatile. For example, you can set up automatic investments so you keep buying during market downturns. Others give themselves a waiting period—24 to 48 hours, for example—before acting on any stock tip or investment idea to provide them with time for research and to avoid the emotion of the moment.
2. Not Having an Investment Plan
Without an investment plan that identifies your goals, it’s easy to overreact, invest reactively, or underestimate risk, said Nathan Sebesta, CFP and owner of Access Wealth Strategies. For example, investors acting without a plan may jump into investments that carry more risk than they can reasonably manage.
Conversely, investors who develop a plan that considers their objectives, timeline, risk tolerance, and their contribution amounts are better positioned to achieve many of their goals, said Mike Casey, CFP and president of American Executive Advisors.
3. Letting Emotions Drive Your Investment Decisions
When stock prices drop and news headlines scream about market crashes, it’s natural to feel anxious and want to sell everything to cut your losses. “It can feel uncomfortable,” Casey said. But panic selling often happens at exactly the wrong time—when prices are low and recovery is on the horizon.
Another emotional trap works in reverse during rising markets. When everyone around you is talking about their investment wins, or when a co-worker shares what seems like a can’t-miss tip, the fear of missing out can push you to make hasty decisions. But Casey noted that acting without doing due diligence can mean buying a stock that’s peaked and is about to decline, or one that doesn’t fit your specific goals.
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4. Not Planning for Taxes
Taxes can eat into your investing returns, but they’re easy to forget as you worry about setting up your investment account. With a traditional 401(k) or individual retirement account (IRA), you get an immediate tax deduction for your contributions, and your investments grow tax-deferred until retirement. This means more of your money stays invested and compounds over time, rather than being siphoned off to pay annual taxes, Heintzelman said.
Roth IRAs work differently but have their own advantages: You contribute after-tax dollars, but all future growth is tax-free. For younger investors, especially, this can result in decades of tax-free compounding that dramatically boosts long-term wealth.
5. Not Diversifying
Some investors buy stocks in a few well-known companies like Apple Inc. (AAPL) and hope for the best, said Luke Harder, a CFP at Claro Advisors. However, individual companies are exposed to risks, such as the emergence of new competitors that eventually hurt their business.
The easiest way to diversify is through mutual funds or exchange-traded funds (ETFs) that automatically spread your money across hundreds or thousands of companies. Instead of trying to pick the next big winner, you’re essentially betting on the market’s long-term growth—a much safer and historically reliable strategy for building wealth.
6. Not Reviewing Fund Expenses
While mutual funds, ETFs, and similar vehicles can help you diversify, it’s important to check their expenses. “They can be very, very high,” Harder said. Generally, an expense ratio of more than about 0.4% for a fund is getting expensive, he said.
The Bottom Line
The biggest investing mistake beginners make isn't picking the wrong stocks—it's not getting started at all. Every day you delay investing is a day you miss out on compound growth that can't be recovered later. You can start now, even with a smaller investment of $50 or $100 per month. After that, there’s no rush: Investing is a “get rich slowly” endeavor, Hughes said.
To get going, you’ll want to create a clear plan with specific goals, diversify through low-cost index funds rather than trying to pick individual winners, and maximize tax-advantaged accounts like 401(k)s and IRAs. By avoiding these common mistakes and staying focused on your long-term goals, you’ll avoid letting emotions and fees sabotage your financial future.