Investing is one of the best ways to build wealth over time, but it’s not without its challenges. For novice investors especially, it’s easy to make mistakes that can derail your financial goals. If you’re just getting started, don’t worry! Mistakes are part of the learning process, and with the right knowledge, you can avoid the most common pitfalls.

1. Skipping a Clear Plan

When excitement about investing kicks in, it’s tempting to rush in without a solid strategy. Many people jump into stocks, mutual funds, or even day trading without asking themselves what they’re trying to achieve. This often leads to confusion, impulsive decisions, and even losses.

  • Why this happens: It’s easy to get overwhelmed with advice, trends, and so-called “hot tips.” Without clear goals, you might spread yourself too thin or chase short-term wins instead of focusing on your financial priorities.
  • How to avoid it: Before you invest a single dollar, define your goals. Are you saving for retirement, building a safety net, or trying to grow a down payment for a house? Once you know what your goal is, develop a realistic timeline and decide how much risk you’re comfortable taking. From there, you can choose investments that align with your needs.

A long-term goal like retirement might lean toward steady options like index funds, while shorter-term goals might require safer, more liquid investments.

2. Not Diversifying Your Portfolio

“Don’t put all your eggs in one basket.” It’s an old saying, but it rings especially true for investing. One of the worst mistakes beginners make is putting too much money into a single stock, company, or sector. This leaves you vulnerable if that investment underperforms.

  • Why this happens: It’s common to feel more confident investing in what you know. Maybe you’re a fan of a particular company or hear about tech stocks taking off and think, “Why not go all in?”
  • How to avoid it: Diversification spreads your money across several types of investments. This reduces risks because a poor performance in one area won’t tank your entire portfolio. If you’re unsure where to start, look into low-cost index funds or exchange-traded funds (ETFs). These automatically give you exposure to a wide range of assets, offering built-in diversification.

For example, rather than buying shares of a single tech company, an ETF focused on the S&P 500 can give you a stake in 500 different companies.

3. Trying to Time the Market

The idea of “buying low and selling high” sounds simple, but in practice, timing the market is incredibly difficult, even for professional investors. Some beginners try to predict market highs and lows, often waiting too long to jump in or exiting too soon out of fear.

  • Why this happens: Emotional reactions, like fear during market downturns or greed during surges, can cloud judgment. Everyone wants to avoid losses or capture a big opportunity, but this mindset may cause you to miss out on long-term growth.
  • How to avoid it: Focus on time in the market, rather than timing it. Historically, staying invested for the long haul often yields better results compared to making rash decisions based on short-term fluctuations.

To remove emotion from the equation, consider using dollar-cost averaging. This strategy involves investing a fixed amount of money at regular intervals, regardless of market conditions. You can invest $100 into a portfolio each month. This approach helps you avoid the stress of guessing the “right time” to invest and ensures you’re always making progress.

4. Overlooking Fees

Fees might not seem like a big deal at first glance, but they can eat away at your returns over time. From brokerage fees to management fees in mutual funds, these costs can silently chip away at your portfolio’s growth.

  • Why this happens: Many novice investors don’t realize how much fees can vary between accounts and funds. Additionally, terms like “expense ratio” or “management fee” can seem confusing or easy to ignore.
  • How to avoid it: Research your investment options carefully and compare fee structures. Opt for low-cost funds, like index funds or ETFs, that often have expense ratios under 0.10%. Many online brokers now also offer commission-free trading for stocks and ETFs, helping further reduce costs.

A good habit is to review your accounts annually and assess how much you’re paying in fees. Every dollar saved on fees is a dollar working toward your goals.

5. Neglecting to Revisit and Adjust Your Portfolio

Investing isn’t a “set it and forget it” process. Life changes, financial goals evolve, and market conditions shift, so it’s important to review your portfolio periodically and make adjustments as needed.

  • Why this happens: It’s easy to get busy or feel unsure about making changes once your money is invested. Some beginners avoid revisiting their portfolios because they’re afraid of doing something wrong.
  • How to avoid it: Commit to checking in on your investments at least once or twice a year. Look at how your portfolio is performing and make sure it’s still aligned with your goals and risk tolerance. For example, as you grow older or near a major milestone like retirement, your investment mix may need to shift from higher-risk equities toward more conservative assets like bonds.

Additionally, rebalancing is crucial. Over time, some investments will grow faster than others, potentially throwing off your original allocation. Rebalancing ensures you stick to your plan. Tools like robo-advisors can make rebalancing easy by automating the process.

Every small step you take now, whether it’s building a diversified portfolio or committing to consistent contributions, puts you closer to achieving your financial goals.