In my 10+ years as a financial planner, I've seen the same mistakes made over and over again when it comes to investing. Here are the mistakes and what you can do instead:
Mistake 1: Investing in Chunks
Something to keep in mind is that personal finance is more about psychology and behavior than numbers. Because of this, and because of the nature of the stock market (i.e. it in generally volatile, meaning it has large positive and negative swings the timing of which are generally unpredictable), investing in chunks can be a big mistake for many people from a psychological perspective.
$12,000 per year invested in one chunk when you get your bonus every year can have the same end result as investing $1,000 per month or $250 per week when you're investing over 20 years, but the three can have wildly different psychological implications. If you happen to invest $250 today and the market goes down 30% tomorrow, you're down $75. Painful, yes. But next week when you invest another $250, it's unlikely that there will be another identical 30% drop the day after again. Maybe it will be up, maybe it will be slightly down, maybe it will be flat. You might not make your original $75 loss back by the next week, but your next contribution will add to your portfolio and chances are that after your month of 4 weekly contributions, even if you're down overall, some of your contributions will have less of a loss than the initial 30% drop. If you invest $12,000 instead of $250, and the next day the market is down 30%, you're down $3,600. And if you're not adding anything to your investments until the same time the following year, chances are it will take a while for you to make back that return. Whatever you're invested in will actually have to make more than 30% to get you back to $12,000. And that alone may make it really difficult for you to want to add $12,000 the next year, even if you have 20 years to invest, and especially if your initial $12,000 is still down. And your motivation to contribute is such a large part of being able to build wealth and have strong long term investment growth and returns.
The solution? Try to invest every week. Being consistent is more important than how much you invest at a time. You don't have to wait until you have $100 or $1000 to invest- adding whatever you can in smaller intervals means you benefit from dollar cost averaging, and it's likely you'll barely feel it which will make it easier to invest more. This doesn't mean don't invest a bigger chunk when you get your bonus or a tax refund, but it is important to keep in mind the psychology and that you have some kind of weekly ongoing investment so that you can get the psychological returns of dollar cost averaging.
Mistake 2: Not Treating Most of the Money You Invest Like It's Gone
The second biggest mistake I see, especially when it comes to non-retirement investment accounts is missing out on compounding. The truth is, many people will 1) say their investment is for some future goal or 2) say they afford to lose whatever they're investing without that really being true, but really, they aren't committed to a long term strategy. Especially with non-retirement money, people tend to overestimate their ability to not spend the money invested on some shorter term goals. This becomes a problem because when the expressed amount of time available for money to compound is long, the portfolio recommended is typically one that in the short term may be a bumpy ride, but in the long term is expected to yield the investment results the investor is looking for. A portfolio that is likely to meet your 10 year investment goal, may not meet your needs 1 or 2 years later if you decide you need the money for something else. However, even if the portfolio did manage to meet or exceed expected returns in the short term, cashing out early means missing out on the power of compound interest because compounding takes time.
The solution? Treat a significant portion of the money you invest like it's gone. Pretend you just spent it on lunch or a vacation and that you can't get it back. Not because you will actually lose it, but because that ensures that you won't be counting on it and need to cash it out before it has time to compound and grow. There are things you will need money for in 10, 20 and 30 years no matter what your age is now, and that money should be invested like you will never see it again. A few extra years on the back end of an investment window can literally double your returns- it is one of the primary ways to make your money work harder for you.
Mistake 3: Failing to Diversify
I can't tell you how many times I've met with a potential client who has investment statements from 3+ different institutions that are all essentially invested in the same things. That is not diversification. If I have a savings account at Bank of America, Wells Fargo, and Leader Bank, and all of the interest rates are .5% with no additional benefits, I haven't accomplished anything by having the 3 bank accounts except by making my personal finances messier. Now, I have 3 account numbers to keep track of, three tax documents to wait for, three different customer service numbers to deal with, three different criteria to satisfy to make sure I'm not paying excess fees, etc. If all my savings were just at the one bank that had the best service or the most convenience, it would be much simpler to manage. The same can be said of investment accounts. There is no point having a bit of money at Fidelity, TD Ameritrade, and Schwab unless they are giving me different benefits. They are all basically banks that hold my investments. And what I typically see, is investors will have accounts at different institutions and then they will buy essentially the same investments at each one. They will buy a Fidelity S&P500 index fund in their Fidelity account, a Schwab S&P500 index fund in their Schwab, etc. And when you look at the underlying holdings they are largely the same. There is no benefit or real diversification there. They all have the same top 10 holdings.
The solution?Achieve real diversification by purchasing indexes of different asset classes. Instead of multiple S&P500 index funds which all have the same type of Large Cap US Equities, buy indexes of different asset classes. Examples are an international or global index or a bond index. Those are actually different holdings. Different funds with different goals. The underlying investments in holdings are what make you diversified, not the company you open your account with.