6 Investing Money Mistakes to avoid
Now that you are at the end of the tunnel, figuring out what’s next could be tough because there are no exams to ascertain the proficiency level of your investing or trading abilities. Even if there is, flourishing in the theory aspect of investing might not necessarily translate to success in the real world.
The reason is very simple: Psychology.
Remember the time you worked, trained, or prepared so diligently and hard for something, and when it came time to shine, literally none of whatever you had put your heart and soul into during practice manifested. You then get flustered and it just gets worse and before long, everything is in a downward spiral.
Well, that’s exactly how investing or trading can be, except that now your hard-earned money is on the line.
Nobody can predict where the markets are headed and it’s one thing to know in theory to buy low and sell high, it is another to act upon it.
Truth is, how many of us retail investors froze and made sure that no single cent of our net worth gets invested during the Covid Pandemic downturn in 2020 and then turn around the next minute when the market recovered and say “I’m hoarding all of this cash because when the next downturn comes, I’m going all in!”
Well, as of this article, S&P 500 has dropped more than 10% year to date. How many of us are really in the market right now?
So you probably can see how theory and reality sometimes might misalign because of Psychology and that is why we have decided to dedicate an article to addressing the common pitfalls relating to the Psychology of investing. These money mistakes are the ones that I faced so aside from learning from them, you can also come back and read this article anytime you feel sad and need something to laugh and cheer you up.
With that said, here are the 6 money mistakes to avoid when it comes to investing.
1. FOMO and The Desire for Instant Success
For most parts, what drew us towards the world of investing is hearing about or sometimes seeing firsthand the success stories of people around us. There is nothing to hate or judge over here because there is nothing wrong with wanting to grow our money.
The issue usually lies in the underlying desire for instant success behind the notion of wanting to invest and grow our wealth which even we might not be privy to.
The problem with having this mindset is that it encourages excessive risk-taking for quick gains like overly concentrating our capital or going all-in into 1 single idea. Yes, you can bag some handsome gains this time round but understand this, we can get 3 consecutive heads when flipping a coin but eventually we are going to get a tail because of the laws of probability.
Similarly, this notion of probability is eventually going to catch up with you and wipe everything out.
The reason why I liken it to a coin toss is because there is not much difference between doing this and gambling. What you are doing is essentially just seemingly educated gambling.
At the end of the day, it is very important to remain level-headed and if possible, spread your capital out into non-correlated ideas.
There is no hard and fast rule to this but a good gauge would be to re-evaluate your idea if it makes you feel uncomfortable.
For example, I had the seemingly “genius idea” of taking out a balance transfer at the cost of 3% per annum and placing it into Terra Luna’s Stablecoin ecosystem’s Anchor Protocol at around 19.5% of staking interest per year. This means that I get to earn 16.5% out of thin air!
Exchange rate fluctuation aside (since they are denominated in US dollars), this would have been a very classic case of arbitrage.
What could possibly go wrong?
Well, plenty. Unless you have been living under a rock, you would have known by now how my thesis would have turned out.
The very lucky thing for me was that I had felt uncomfortable with the idea that UST (Terra Luna’s Stablecoin) was not backed 1:1 by actual US dollars (and even if they are “claimed” to be backed, how do I know with certainty here? Its Crypto, guys!). And for that alone, I was out. (Picture me saying it with Shark Tank Swag).
So whenever you are faced with an uncomfortable feeling about your idea, don’t leave it hanging. Make sure you go down to the core of the feeling and answer your every doubt to a point that you are rationally satisfied with the idea before moving forward with it.
I know it seems that everyone is ahead of the curve making so much money and we are so behind but always remember “Haste Makes Waste”.
2. Have faith in your idea. There’s nothing to fear if it is sound
The problem with someone wanting to pick up investing knowledge during my late adolescent time was that there didn’t seem to be enough information and resources back then. More than a decade later, the script has been flipped and there is so much information and resources available that it can be very overwhelming.
One minute you hear about how John grew his wealth successfully by trading stocks, and the next you hear about Sally amassing a respectable amount of wealth by trading options. Before you can digest this piece of information, you hear that Alex has quadrupled his capital after about a year of trading in NFTs.
After hearing all of it, you feel deflated with how your index fund portfolio is doing because it has been dropping non-stop like a falling knife for the past year and wonder to yourself why it seems that everyone is making money except for you.
When this comes to mind, always remember that there are many ways to get to Rome and not everybody will take the same path there. The most important thing is that you take the path that is most suitable for you.
For example, a mid-career engineer and a mid-career architect might be earning $5,000 a month salary each. If they have the same spending and savings habits, both will reach a $100,000 savings milestone at the same time BUT with totally different paths.
However, if I were to put either of them into the other person’s job, they will likely take way more time than they would have if they were in a job where they had the skills and knowledge which would be more suitable for them.
Similarly, if I am working a 9 to 5 job and have to take care of the kids when I get home, it probably might not be a good idea for me to try and quadruple my money trading in NFTs like Alex as he is a business owner and has hired a person to oversee his business who has more time to stay abreast of the very fast-moving NFT market.
3. Do Your Own Research (DYOR) and be critical of the information
As much as there is a wealth of information available today for us to consume, especially online, we have to be very critical of this information as well.
It is very important to understand that there is always an agenda behind every piece of information. If the ultimate agenda of somebody providing that piece of information is education, then it is great. However, this might not be the case for everybody.
Take, for example, there was a leaked price list of how much it costs to get certain Twitter influencers to ‘shill’ certain cryptocurrencies.
How nice (or not!) would it be to have Lindsay Lohan at your own personal crypto party!
So always exercise caution and be critical towards every piece of information as much as you can because you wouldn’t want to be caught in a situation where you are the last person to hold the poison ball.
4. Experiencing market downturns
It is one thing to talk about how markets recover from downturns by looking at old charts but it is another to experience one ourselves. The pain of seeing your net worth drop by a good 20-30% is excruciating.
We might start forming bad and unhealthy habits by obsessively refreshing our trading app to see if the market had reached an inflection point and if our investments had started turning green.
We lose sleep and focus over it.
And this is not at all a good thing.
Take a look here, as much as the market recovered extremely well during the Covid Pandemic Crisis, it still took about half a year from February to August for the market to get back to the same spot.
For our mental health, it is no good to be constantly checking our investments for a day, let alone half a year. Know that the trajectory of the market is beyond our control. What would be best is to clear our minds, reflect on what could have been done better, and move forward.
Again, it goes back to the core principle of having faith in our well-researched and back-tested ideas. Also, the amount of capital that I had invested into this idea does not make me lose sleep or be financially affected should the market go against my favor.
5. It is always ok to start small
Yes yes, I know that you have quite a lot of capital set aside to get ready to grow your wealth and you feel like a punk if you don’t vest all your capital into your investment strategies in case you miss out on the gains.
Let me tell you this. If you feel unsettled, don’t do that. Start with a smaller portion of your capital to get a feel of the markets because there are always blind spots that we might not be privy to before diving into the markets. What would be even better is to start with a demo account. Go through a whole practical session before using real money.
The most important thing in life is progress and even though you might feel like trading on a demo account is like a tiny step, it is still one step closer to where you want to be.
6. Really, we don’t know anything
Everybody is an investing genius in a bull market. It is only during a downturn that we can distinguish the good ones from the bad.
Always remember, the market is like nothing that we know. It can knock us out in 1 fell swoop so always be humble, treat it with respect and go into each day with the expectation that you know nothing about it and want to learn something new from it. I can’t guarantee that you will be successful going in with this mindset but I can guarantee that it will increase the probability of you being successful in your investing endeavors.
Conclusion
There is no one perfect way to start our investing journey. I have detailed the various money mistakes I made in my investing journey so that you can better learn from it. My goal is, however, not to scare you away from getting started on your investing journey.
On the contrary, the key to investing success is often just the simple act of getting started, and getting started early!
Do check out the various beginner guides that I have previously written to help you get started on your investing journey today!
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