LHV blog
Financial wisdom/Investor

Five key mistakes that trip up beginner investors

13. feburary 2024LHV

The perception that getting started with investing is a breeze has become commonplace. Given today’s products and conditions, it actually is a breeze, but that does not mean that investors themselves should not dig deeper, think their plans through, and stay realistic. Here are the five main missteps that beginner investors often make.

1. The illusion of rapid enrichment
Great success stories are often shared publicly, but less can be heard and read about lessons learned and failures. The dream of making money quickly and easily can create unrealistic expectations for beginners. It is essential to understand and accept that investing is a long-term process that requires fortitude and perseverance.

2. Investing money that you cannot afford to lose
There are lower-risk and higher-risk investment opportunities, but it must be kept in mind that every investment involves risk. One common mistake is to invest money you really cannot afford to lose. Let us assume, for example, that you have cash in hand from the sale of your home, which you plan to use soon to buy your new home. The idea of investing this money in the short term, for example, in shares, in the hope of increasing the amount, is extremely risky. In other words, you should only invest the cash in hand that won’t sink you if lost, changing your quality of life for the worse.

3. Lack of a goal or strategy
People often start investing without any goal or strategy. They just get on with it. This is not necessarily wrong, but it can cause a loss of focus and turn investing into an emotion-driven activity, rather than a purpose-driven one. Dreams are different and can change over time. Regardless of whether you dream of an expensive car, want to see the world, or secure your future. Setting a goal will help you stay on track and stay in control of your actions.

4. Overreacting to market fluctuations
Beginner investors often panic when share prices fall, rushing to sell them. At the same time, when markets start racing, beginner investors may get too excited and start making overly impulsive decisions. To achieve long-term success, it is important to have firm goals, stick to your strategy, and avoid emotional decisions.

5. Superficiality and lack of knowledge
Warren Buffett, a famed investor and one of the richest people in the world, has said that risk comes from not knowing what you are doing. It is important to understand the principles of how stock markets work, and to be familiar with different asset classes and the risks associated with them. Before investing anywhere, you should also make it clear to yourself where you are investing your money, and why there, specifically. Often, people prefer to invest their money in companies whose services, products and activities they know and believe in. If you are a strong opponent of electric cars and do not believe in their future, you might want to think twice before investing in Tesla.