Top Investing Mistake #6: Going Big Too Soon
When people start investing, they typically have no idea about what they are doing. Some people lose money at the beginning, and others make money right away. Making money is very encouraging, but it can also be a problem.
New investors typically have no idea how to measure the risk of an investment (see Top Investing Mistake #5). When they make money right from the start, it is easy to conclude that there is no risk. And so they start making large investments that can cause massive losses. They think that they can’t lose, so they start trading their entire account on a single stock or option.
Stock options are especially unforgiving. For example, when trading options, it is possible for the value of an option to quickly go to zero. If someone uses their entire account to purchase the option, then in a matter of minutes their account can be wiped out.
Another thing that happens to new investors is that they borrow money to invest. They think that they can’t lose, so they borrow money from their house or their credit cards. Although there is nothing inherently wrong with borrowing money to invest, I wouldn’t recommend it to someone new to investing. Since they have only been making money, they become blinded to the very real possibility of losing. And, if they have borrowed the money that they have lost, they now have a serious problem.
The root desire to make large investments too soon is greed. Many people love to make a large sum of money as quickly as possible. Although this is definitely possible, to do it and manage risk at the same time requires experience and skill. New investors simply don’t have the experience or skill. It’s like having a driver’s permit and getting behind the wheel of a new Ferrari. Yes, it’s very exciting. However, it is easy to go way too fast, lose control, and crash.
One of the reasons that investing is a bit of a mysterious art is that we receive no investing training while in school. School teaches us the basics of literacy, and the specific skills needed to do a job, such as accounting or medicine. But school does not teach us how to invest and become financially free. Perhaps one day there will be a school that will teach people how to invest, and how to avoid this common investing mistake.
Related posts:
- Top Investing Mistake #5: Not Managing Risk
- Top Investing Mistake #4: Not Getting Enough Information
- Top Investing Mistake #2: Failure to Launch
- Top Investing Mistake #8: Not Getting Buy-In from Important People
- Top Investing Mistake #10: Not Finding Your Groove
Related posts brought to you by Yet Another Related Posts Plugin.
is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
