The stock market isn’t as bad as people make it look. However, you can lose your entire investment in a flash due to serious mistakes.
However, not many people know of these mistakes let alone avoid them. Most of them only follow the masses and move with the wave such, which is a dangerous path when trading in stocks.
With this in mind, why don’t we go over the mistakes you must avoid when investing in the stock market.
- Excessive Trading
Every time you sell and buy your investments, you put yourself at risk of losing money. Take this example, if you placed a $10,000 investment in S&P 500 way back in 1995, you’d be worth $59,593 in 2014 courtesy of a 9.85% annual increase.
On the other hand, in the 19-year period, there were 10 excellent trading days and if you missed them, your returns would fall to 6.1%. For the same period, your initial investment would return $30,803. Over $29,000 indifference.
This means timing is crucial but extremely difficult to nail. Not even the pros in the market get this perfect.
- Investing in Wrong Accounts
As an investor, taxes will play a huge role in decision-making. Therefore, a wrong move while investing will cost you a lot of money in taxes.
Hence, it’s crucial to know which type of investment goes into which account. This is because various investments have varying taxations. For example, municipal bonds, stock mutual funds, and stocks are perfect investments for taxable accounts.
The reason is taxation on such investments only occur on the capital gains, which is far lower than normal income tax rates. Thus, bonds will be safer in retirement accounts which are taxed as normal income.
- Failing to Invest in Your Retirement Contributions
If you fail to contribute the money your employer matches in your 401(k), then you’re burning down free money. Most of the employers will contribute to your retirement plan by the dollar.
For instance, if you earn $80,000 per year and fail to invest $4,000 in your retirement plan, then you’re not only denying yourself a comfortable sunset life but also….
- Ignoring Management Fees
Investing in stocks is an overwhelming affair. That’s why you need a financial advisor. However, you must part with a certain amount in fees to facilitate the management. These fees will vary from one fund to another starting from 0.03% up to 1%.
For a better understanding of how these fees affect your overall investments, you can visit the SEC website. Nevertheless, let’s use a simple example.
Take an example of a simple investor willing to invest $100,000 for a maximum of 20 years in a stock that will return 4% per year on average. After this period elapses, if the management fee was 1%, then the investor will have to part with $180,000.
If the investor opted for a 0.25% management fee, they’d have to part with a whopping $210,000, resulting in a difference of $30,000 between both fee funds.
There you have it. Some of the most common and devastating stock-trading mistakes many beginner investors make. By avoiding them, you’ll have a greater chance at succeeding in the murky waters that is stock trading.