- The Moneycessity Newsletter
- Posts
- 6 Investing Mistakes New Investors Are DEFINITELY Making
6 Investing Mistakes New Investors Are DEFINITELY Making
These 6 investing myths make the inexperienced wish they never started investing. Thankfully, none of them are true and all of them are easy to avoid.
There are 6 common myths inexperienced investors believe that either stop them from getting started or make them want to quit.
On the go? Watch the video HERE.
1. Stock Price is so Low it Can’t Drop More
The first and most damaging myth is that a stock that already dropped nearly to zero can’t drop that much more. It seems counterintuitive but it can drop WAY more.
List of Stock Splits by Date
Here is a list of stock splits since the beginning of 2024. One example of a recent stock split is Nvidia. In June 2024, Nvidia’s stock price exceeded $1,000 per share.
Paying $1,000 for a single share is pretty cost prohibitive so they did a 10 for 1 split. Each $1,000 share was split into ten smaller shares worth $100 each. Everyone still had the same amount of money. This is a forward split.
Forward Stock Split — Illustration by author
When you look at this list, you will notice that the vast majority are reverse stock splits. A reverse stock split happens when the share price drops too low. The company takes ten of your $100 shares and combines them into one $1,000 share.
Reverse Stock Split — Illustration by author
Don’t be fooled into buying a stock that dropped from $10 to $1 thinking that it is already at the bottom and cannot drop any lower.
A reverse stock split can send it back up to $10 but you didn’t make any money. The stock price can fall from $10 per share back down to $1 again except you have a tenth of your original shares. And you just lost 90%.
It is much more useful to think in terms of percentages. No matter what the share price is, it can always drop by 100% (aka. bankruptcy) which means you lose everything you put in.
2. The Stock Market is Very Risky
Many investors avoid the stock market altogether because they think that the stock market is too risky.
Yes, the markets do carry some risk. But not investing in the stock market also carries a significant risk!
In times of significant inflation, the cost of goods has gone up by more than 10% in a single year many times. Even bonds, certificates of deposits (CDs), and high-yield savings accounts cannot keep up with hyperinflation.
US Inflation Rates by Year
The stock market can though. The cost of goods increases and the companies selling those goods make more money. Many sectors of the stock market are protected from inflation in this way.
After COVID, I noticed most fast food restaurants have literally doubled their prices. I wasn’t happy when Chipotle’s prices went up, but I kept going because the prices went up everywhere.
When we look at Chipotle’s stock price right before COVID, they’re sitting at about $18 a share. Since then, they’ve reached a high of almost $65 per share. This is a perfect example of how a store can increase the cost of their goods and make additional profit when inflation is high.
Not investing at all will only guarantee that you lose money to inflation.
3. I’m Too Old / Too Young to Start Investing
First of all, you can never be too young. Investing only gets better the earlier you start doing it.
“The best time to start investing was yesterday, and the second best time is right now.” — Unknown
Since stock market returns are compounding, time is your best friend.
Compounding Interest Explained
As far as being too old to invest, that is possible but incredibly rare.
Unless your life expectancy is less than 5 or 10 years, you are much more likely to benefit from the stock market. Historically speaking, if you are invested for at least 5 years, 90% of the time you would make money.
Unless I only had a few years left to live, age is not a good reason to stay out of the market.
4. Investing is too Complicated
I can see where this sentiment is coming from.
Ten years ago, I didn’t know the first thing about investing besides buying low and selling high. I assumed I needed to be a sophisticated financial analyst or something.
However, I have since learned that investing is only as complicated as I want to make it. We can get better results by putting in time, energy, training, and education.
Investing is similar to working out.
“Working out” for an Olympic athlete or professional bodybuilder is probably very complex. That doesn't mean I can’t perform a simple workout and enjoy huge benefits. Just working out 15 minutes can do wonders for my physical and mental health.
The same goes for investing.
If I simply put a small amount of money in a diversified index fund every week and never look at it until I retire, I will be way better off than if I did nothing at all.
5. Investing is too Time Consuming
The same working-out metaphor applies here.
While bodybuilders work out three times a day with perfect nutrition and steroids, I can still work out 15 minutes every day for great results.
When it comes to investing, I need even less time than that to invest and perform above average.
Maybe the first day, I would spend 15–30 minutes setting up my checking account to send money to my brokerage account automatically and for my brokerage account to automatically invest into an index fund. After that first day, I’m done!
Imagine working out for 15 minutes but your muscles continue to grow forever even though you never work out again. That is how easy it is to invest which will be better than average!
Average Investor Returns VS Everything Else
The average investor actually gets worse returns than a passive index fund. Over the 20 years in this study, the average investor only got an average return of 2.1%. During the same time, people who simply held an S&P 500 index fund made over 8% per year.
This huge discrepancy is because investors are buying and selling too frequently and at the worst times. The average investors tend to buy when prices are high and sell when prices drop.
6. What Goes Up Must Come Down
Stock prices do not abide by the laws of physics.
Unfortunately, humans still have an intuition that stock prices have inertia. This feeling of inertia causes us to get out of a stock when it’s falling because it feels like the stock will keep dropping.
Once there’s a trend that is clearly and significantly down, the damage is already done and an investor won’t buy back in until they see a clear and significant trend upward.
S&P 500 Performance Over the Last 50 Years
And then of course, by that time, the stock price is already higher than when they sold. We have a classic case of buying high and selling low — breaking the number one rule of investing.
Investing is not physics. A stock that is down may never recover and a stock that rapidly appreciates may never return to previous prices.
Market forces are much more complicated than the force of gravity.
So What Now?
Even if you avoid all the fatal myths, everyone eventually makes mistakes.
We all buy a stock that drops in value at some point. There is a bonus fatal myth which is as long as you keep holding, you haven’t lost money.
Unfortunately, holding too long can be very costly. But fortunately, there is a way to get out of a bad stock purchase and still get something out of it.
Click HERE where I share the best way to exit a losing position.
Catch you on the flip side.
Reply