8 Potentially Expensive Investing Mistakes & How To Avoid Them

Forbes

8 hours ago

One report concludes the average equity investor under-performs the stock market by more than 840 ... More basis points.
A recent report from financial services consultant DALBAR concluded that the average equity investor earned a 16.54% return in 2024. That may sound like a win, but the S&P 500 grew 25.02% in the same period. The S&P 500 is widely viewed as a benchmark for the overall stock market—which means the average investor under-performed the market by over 840 basis points.
The lag is surprising, given that investors can buy an S&P 500 ETF to keep pace with the market before fees. The DALBAR analysis said "investors continued to under-perform due to their own behavior," citing withdrawals from equity funds just before market surges.
If you have $10,000 invested, an 840-basis-point miss costs you $840. Repeat the same mistakes a few years in a row and your net worth is thousands below where it could be. Let's sidestep that outcome by learning about eight potentially expensive investing mistakes and how to avoid them.
1. Not Investing
The average savings yield in December, 2024 was 0.42% according to the FDIC. You may have earned higher cash rates last year if you kept your money in CDs or high-yield savings accounts. But a 4% APR on a cash deposit doesn't come close to last year's 25% gain in the stock market.
Cash is important to have on hand. You need it to cover unexpected expenses or income changes. Unfortunately, bank deposits don't offer the same wealth opportunities as stocks. If you want to grow your net worth, stock investing is one of the simplest ways to do it.
How to avoid this investing mistake: Open a low-cost brokerage account and invest monthly in an S&P 500 ETF. Your monthly budget can be small to start, but plan on increasing it as you get more comfortable.
2. Timing The Market
Timing the market is an investing strategy that attempts to predict stock price trends and profit from them. Imagine knowing ahead of time that stocks would fall dramatically on Monday and then surge back on Tuesday. You'd invest on Monday when prices are low and sell on Tuesday for a quick profit.
The problem is that making these predictions accurately is difficult. Even professional investors have spotty records in this area. Studies comparing the performance of actively and passively managed funds prove it. Active funds rely on human research and decision-making to time trades. Passive funds follow an index like the S&P 500 and don't bother with opportunistic portfolio changes.
An analysis by financial services firm Yodelar found that 57% of active fund under-performed their sector average over five years, while only 40% of passive funds under-performed. The takeaway is that accepting market volatility can be more profitable than trying to profit from it.
How to avoid this investing mistake: Invest consistently every month, whether the market is strong or weak. And the next time stock prices fall, challenge yourself to wait it out. Hold your portfolio the same and see what happens on the other side.
3. Following The Crowd
When investors are optimistic, stock prices rise. When investors are discouraged, stock prices fall. Getting caught up in these sentiments encourages you to buy high and sell low. You can't make a profit that way.
This is why famous, billionaire investor Warren Buffett once advised investors to "be fearful when others are greedy and greedy only when others are fearful." This contrarian approach makes it easier to buy low and sell high, which is what you want.
How to avoid this investing mistake: Don't buy or sell because everyone else is doing it. If you feel the need to take action in a down market, increase your holdings in high-quality stocks when their prices are down. You'll be well-positioned for gains when the market recovers.
4. Going All In
Going all in refers to spending your entire investing budget on one stock or one industry. This strategy can expose you to extreme volatility and high loss potential. It can also prompt you to make other investing mistakes, such as timing the market, following the crowd and emotional decision-making.
How to avoid this investing mistake: Diversification is the solution. Spread your wealth across at least 20 individual stocks plus some Treasury securities if you can. Or, invest in ETFs with well-diversified portfolios.
5. Paying High Fees
Account fees, fund fees and trading fees pull money away from your investments and lower your returns. You can't avoid all investing fees, but you can make sure you're not paying more than you need to.
How to avoid this investing mistake: Dive into your brokerage account and funds to list the fees you're currently paying. Then look for lower-fee alternatives for the account itself or your investments. Say you are invested in SPDR S&P 500 ETF Trust (SPY), which has an expense ratio of 0.0945%. Unless you have a reason for investing in SPY specifically, you could shift new investments to SPDR Portfolio S&P 500 ETF (SPLG). It tracks the same index, but has a lower expense ratio of 0.02%.
6. Skipping The Research
Making investing decisions based on limited information can be dangerous, particularly if you're picking stocks. Fund-based investing strategies are less research-intensive, but you still should understand what you're buying and how you can expect it to perform.
How to avoid this investing mistake: Spend time educating yourself. You could allocate a short, weekly time time slot on your calendar for this. Use it to research securities or investing strategies. Ask questions and find answers. The more time you put in, the better investor you'll be.
7. Getting Emotional
Emotions can convince you to sell when the market is down, even though logic says stock prices will eventually recover. Emotions can also urge you to buy tech stocks at crazy-high valuations, even though logic says there's a point at which their prices become unsustainably high.
Ryan Kahn, managing director at Dyad Capital, acknowledged this common investing problem in an interview. "It's easy to let emotions drive decisions when the market is down, but that's usually when you need to stay disciplined," Kahn explained.
How to avoid this investing mistake: Kahn recommended focusing on the fundamentals and not letting "short-term noise derail your long-term strategy."
If you don't have a long-term strategy, make one. Document what you're trying to accomplish and how you will do it. Include your methods for making trade decisions, and the criteria that make a security buy-worthy or sell-worthy. The next time you feel like making a rash decision, go to your documentation and follow the methodology you defined in calmer times.
8. Investing What You Can't Afford To Lose
Inevitably, your investments will lose value. Panic can result if the loss pinches your finances. At best, panic can push you into emotionally driven decisions like selling securities to avoid deeper losses. At worst, panic can encourage you to chase gains to recoup lost capital. That can lead to bigger losses and more panic.
If you can afford to leave your capital invested during market downturns, you don't have to panic. You have the option to keep your portfolio intact, at least until stock prices recover and return to growth.
How to avoid this investing mistake: Build a cash emergency fund before you start investing. Use that fund for unexpected expenses, so you won't have to reach into your portfolio. Also, only invest money you won't need for at least five years.
Hartford Funds reports that bear markets last 9.6 months on average. So, the five-year timeline is a buffer to protect against a downturn followed by a slow recovery.
Fewer Investing Mistakes For Higher Returns
The stock market's long-term average annual return is 6% to 7% annually after inflation. You can produce similar returns in your portfolio by investing regularly in a low-fee S&P 500 fund and—this is key—leaving your money invested for decades. Dedicate yourself to this simple approach and you'll avoid market timing, emotional decision-making, crowd-following and other potentially costly investor mistakes.