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New to investing? Here are 5 mistakes to avoid

While hindsight can be a wonderful thing, foresight is better. Here are five common mistakes to avoid when investing for the first time.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Investing for the first time can be daunting. Some will be apprehensive. Others will dive straight in, happy to learn from any mistakes as they go.

But what if we knew the common mistakes before we started? We’d be more confident and better prepared.

Here are five common investing mistakes to avoid as a new investor.

This article isn’t personal advice. If you’re not sure if investing is right for you, ask for financial advice. Unlike the security offered by cash, investments can rise and fall in value, so you could get back less than you put in.

No. 1 – investing before clearing your debts

Before you start investing, you need to make sure your finances are in good health.

Pay off your store cards, credit cards and other short-term borrowing. The interest rate you pay on these can cost a lot and damage your finances.

Next, get your cash savings in order. If you’re working, we think you should have at least three to six months of essential outgoings in an easy access account. If you’re retired, you should ideally have one to three years’ worth.

This is your safety net. For when ‘life happens’. It’s there ready to jump in when there are any emergencies like your car breaking down, or worse, losing your job.

It will also make the next investing mistake easier to avoid.

Discover the 5 key building blocks for financial resilience

No. 2 – acting on your emotions

It’s easier said than done, but it’s important not to act when you’re excited or too wary.

Investing can really mess with your emotions at times. There’s a reason why we see some investors pile in when markets are doing well and sell when they’re falling.

But this goes against basic, good investment practices.

It’s important not to invest in the hope your money will go up today, tomorrow, or next week. Investing isn’t about trying to time the market, it’s about the time in the market.

It’s an unglamorous truth, but the idea of investing is to get rich slowly. Over many, many years. And if your investments have a bit of a wobble along the way, because there’s a good chance they will, don’t panic.

This is much easier when your finances are in a solid position and you’re investing money you don’t expect to need within the next five years.

Learn about the power of long-term investing

No. 3 – investing in something you’ve never heard of or don’t understand

There always seems to be ‘the next big thing’ to invest in. Something new and exciting, that will revolutionise the world. Or just a hot tip on the internet or social media.

But before you invest in anything, you need to make sure you really know what you’re investing in.

As an investor you should be asking yourself questions like: is this company a good long-term home for my money? Is the business strong enough that I’d be happy to hold it for years if the share price fell tomorrow? Do I think it’ll grow its profits in the future? Does the share price reflect that growth potential?

If the answer to these sorts of questions is no, an investor should be moving on to the next interesting opportunity – regardless of what the share price might do tomorrow.

And don’t put all your eggs in one basket. Cue mistake No. 4.

No. 4 – investing too much in one place

When you invest in a company’s shares, you become part owner of that company.

If it does well, you share part of the success. But if it doesn’t, the value of your investment could go down.

Investing all your money into one company is high risk. Your money is reliant on that one company to do well. By investing in different companies across different sectors and parts of the world, you can reduce your risk. This is called diversification.

One of the easiest and cheapest ways to diversify is by buying a fund.

Funds pool together money from lots of investors. The pool is then invested in a collection of investments. Passive funds will aim to track the performance of an index, instead of beat it. This means they normally have lower charges. Active funds aim to beat the index – the investments are chosen and run by a professional fund manager. That means you’ll benefit from the manager’s knowledge, expertise and research into lots of different companies.

Investing in active and passive funds – when and how to blend them in a portfolio?

Funds come in all shapes and sizes. Some funds only invest in company shares, which could be considered for portfolios willing to accept more risk. Others hold a mix of investments like shares, bonds, commodities and cash for a more conservative way to invest.

Learn more about investing in funds

No. 5 – not having a plan

If you fail to plan, you're planning to fail.

No matter what stage of life you’re at, or how you’ve been investing, it’s crucial to have a plan for your financial future. Whether it’s the first step on to the property ladder or growing enough wealth to enjoy retirement.

You’ll need to know:

  • Why you’re investing
  • Your goals
  • When you’ll need the money
  • The level of risk you’re happy to take
  • The mix of investments you’re looking for and that are right for you

A plan is a great way to give you the confidence to start investing. It’s also great to use when reviewing your investments. Are you still on track? Are you doing what you set out to do? If not, you’ll know what changes you need to make.

How to review your investment portfolio

If you don’t know where to start, it could be worth speaking to a financial adviser. They’ll work with you to understand your circumstances and help you to make sure you’re in the best place to reach your goals.

Find out more about financial advice

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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