Getting Started: Common Pitfalls to Avoid

Common Pitfalls to Avoid

Before you race off through the rest of Investing Basics, there are some cautionary points to consider before you proceed. These are common mistakes many people make when considering what to do about investing.

Doing Nothing. There is no guarantee that the market will go up the first day, month, or even year that you invest in it. But there is one guarantee: Doing nothing at all will not provide for a comfortable retirement.

Starting Late. Postponing your investing career is second only to not investing at all on the list of investment sins. You already know that the earlier you start the better off you are. (Take another look at the compound return example we gave above.) If you're already past those formative twenties (you don't look a day over 32 to us), we'll reword this first pitfall to read: "Not starting now."

Investing Before Paying Down Credit Card Debt. If you have money in your savings account and you have revolving debt on your credit card, pay it off. Many credit cards have an annual interest rate of 16% to 21%. Let's say you have $5000 to invest, but you also have $5000 debt on your credit cards with an average annual interest rate of 18%. It doesn't take an astrophysicist to figure out that you're going to have to get an 18% return after you pay taxes just to break even on that $5000. Pay the debt off first, then think about investing.

Investing for the Short Term. Only invest money for the short term that you're actually going to need in the short term. Invest money in the stock market that you won't need for at least three years, and preferably five years or longer. If you'll need your cash next year for a down payment on a house or for the family Caribbean cruise, use one of the shorter term and safer havens for your cash, such as money market funds or CDs.

Turning Down Free Money. You'd never turn down a dollar if it was offered with no strings attached. That's what you're doing if your company offers a 401(k) or similar retirement savings plan with an employer match and you're not participating. Take advantage of all tax-advantaged, employer-matched savings programs.

Playing It Safe. If you're young, most of your investing dollars should be in the stock market. You have enough time to weather any dips in the market and to reap the rewards of long-term gains. Although you may want to transition into bonds later in life as you depend on your investments for income, stocks should make up a large portion of the portfolio of every investor.

Playing It Scary. Not every investment is for everyone. We'll help you determine your psychological investing profile in Step 2. Investing Concepts. Even if you're a daredevil, you shouldn't pour all of your money into something that could end up going down the drain.
Viewing Collectibles or Lottery Tickets as Investments. If old comic books, Barbie dolls, and abandoned exercise equipment could be used to fund retirements, do you think the stock market would exist? Probably not. Don't make the mistake of thinking your jewelry, those Beanie Babies, or the lottery will provide for you in your latter years.

Trading In and Out of the Market. We believe the best approach to investing is the long-term one. Pick your investments well and you'll reap rewards over the long term that you had ever dreamed possible. Trade in and out of the market and you'll be saddled with fees that chip away at your returns, and you'll potentially miss out on gains that long-term investors enjoy with much less effort.