Broker Check

4 Dangerous Moves for First Time Investors

August 09, 2016
Young members of the workforce are often encouraged to start their investing early in life. The sooner you begin investing, the more time you will have for your money to earn compound interest and the better position you will be in once you reach retirement. However, in the quest to get a head start on retirement planning, many first-time investors make critical errors that can actually set them back on their quest for a strong retirement account. Consider the following four dangerous moves that first-time investors should avoid.
Chasing News Stories
The nightly news always includes a recap of the market's activities for the day, as well as the occasional update on major movers and shakers in the stock market. This makes it incredibly enticing for the novice investor to jump on a "hot" stock tip, following the suggestion of talking heads on TV that a company will be the next "Apple," or simply going all-in on a rumor of major earnings.
Regardless of the circumstances and reporting on the news, this puts you in direct competition with professional firms that get that information immediately when it is available, before it airs on the news. More importantly, they have the know-how to analyze it correctly and quickly. In a best-case scenario, you will get lucky. You may even get lucky a few times, but eventually this approach will fail. In a worst-case scenario, you get stuck jumping in late or base upon the wrong rumor.
The ideal first investment is in a company that you understand, or even better, have personal experience in dealing with.
Putting All Your Eggs in One Basket
Your mother or grandmother warned you about putting all your eggs in one basket, and it is never more applicable than when discussing your financial future. Investing 100% of your financial capital in one specific investment is not a good move. As Investopedia highlights, it is not even safe to put all of your capital into one specific type of investment; such as placing your entire financial capital in commodity futures or bonds. 
USNews recommends proper diversification in your investment portfolio. What does diversification really mean? As USNews points out, diversification is not the concept of owning many different investments, but rather, owning many investments spread across multiple types. For example, investing in stocks, bonds, and mutual funds crossing industrial lines from tech to commodities and even government funds.
A lack of diversification could deliver a huge upside, but it also comes with a lot more risk that you will lose all of your money because it is all tied up in the performance of one company or industry. A financial advisor can help you determine how to properly diversify your portfolio.
Leveraging Up
This means borrowing money to buy more stocks than your own financial capital can procure by itself. Leveraging will magnify both gains and losses on an investment. For example, if you have $100 and borrow an additional $50 to make a $150 investment, you can earn a 75% return on a 50% increase in stocks, but lose all your money if that same stock declines 50% instead.
Leverage can be done with other options that have limited downsides and can be controlled with specific market orders, but it is a complex process and learning to control the amount of capital at risk only comes with practice. It is not suitable for novice investors.
Investing Cash You Cannot Afford to Lose
This might be the most dangerous approach of many first-time investors. To be clear, numerous studies have shown that the more cash you can put into the market the better your overall return will be. However, this does not make it advisable to invest your entire nest egg all at once.
Investing is a long-term concept that requires cash on the side to cover emergencies and other financial opportunities. If you have only enough money to invest or set aside for emergencies, you should not begin investing just yet. This type of investing leads to mistakes that can cost you in the long run.
Again, it is advisable to sit down with your financial advisor to discuss all of your options to ensure that your first investing decisions are sound ones that prepare you for a successful future.
This material is intended for informational purposes only, and is not a substitute for individual investment or tax advice. Investing involves risks and individual circumstances may vary.
For more information, please contact Manhattan Ridge Advisors.