Those new to investing can be excused for not knowing what they don’t know, ya know?

When we’re new to something, we tend to lean on intuition and hope it carries us until we figure out the details. With investing, that’s a risky approach, because it’s your future that’s on the line. I talk with a lot of people about their investments, their spending, and their general approach to money. Here are the most common mistakes I see when people first dip their toes into the investing pool.

1. Investing Before Getting Their Financial House in Order

Don’t put the cart before the horse. Before you invest, make sure you actually have money to invest. That means spending less than you make and not carrying high-interest debt.

If you’re paying 22% on a credit card, it’s hard for any investment to reliably beat that. In most cases, paying down high-interest debt comes first.

It’s also common to think that earning more would solve everything. But spending is usually a behavior problem, not an income problem. The more we make, the more we tend to spend. Take an honest look at your spending, build a small emergency fund, and pay off high-interest debt. Then start investing.

2. Letting Emotions Drive Decisions

One of the hardest parts of being human is setting emotions aside when making a decision, and even seasoned investors struggle with it.

Remember early 2020? Between February 19 and March 23, the S&P 500 fell roughly a third of its value as COVID fears spread. Prices dropped so quickly that the stock market’s emergency “circuit breakers” kicked in several times, pausing trading to slow the panic.

Many people, including some advisors, sold to avoid losing more. You probably know the rest of the story. By August, the S&P 500 had recovered to its previous high, and it kept climbing from there. Anyone who sold locked in their losses and missed the rebound.

The same story played out in the dot-com crash of the early 2000s and the 2008 financial crisis, though those recoveries took longer. It seems the market tries to teach us this lesson about once a decade. As the trolls in Frozen remind us (shoutout to my fellow parents of little ones), people don’t make their best choices when they’re scared or stressed.

Downturns can be the best or worst times for investors, depending entirely on their behavior. Keep a level head the next time one comes around.

3. Overestimating Their Knowledge

When I graduated from college and achieved my lifelong dream of sitting at a desk overseeing food shipments (that beeping is the sarcasm detector going off), I started investing by picking funds whose names sounded good. Sound familiar? Most people assume that approach is good enough. It isn’t.

Small differences in return add up to big money over time. Say you invest $5,000 a year for 30 years:

Average annual return	Ending balance	Difference
7% vs. 8%	$472,304 vs. $566,416	$94,112
5% vs. 9%	$332,194 vs. $681,538	$349,344

Hypothetical examples for illustration only, assuming year-end contributions and constant returns. They don’t represent any specific investment, and actual results will vary.

If you’d rather go it alone, that’s okay. Just do your homework. Learn from people with a long track record of investing successfully, not someone who hit it big on one stock or has the latest hot tip. Those wins are rarely repeatable and usually involve a lot of luck. Good investing isn’t intuitive for most people. Warren Buffett is famous for spending much of his day reading and researching. Even the best know they don’t know it all, and it can help to have someone experienced in your corner.

4. Skipping the Fundamentals

A few core concepts make up a solid foundation:

• Know your goals and time horizon.
• Understand both your risk tolerance and your risk capacity. Tolerance is how much risk you’re comfortable with; capacity is how much you can actually afford to take. Most people forget the second one.
• Maintain an appropriate asset allocation, and rebalance when it drifts.
• Use the right accounts, such as a 401(k), IRA, Roth IRA, HSA, or taxable account, for the right money.

You can still make mistakes with a good foundation, but it doesn’t matter how pretty the house is if the foundation is junk.

5. Trying to Time the Market

“Buy low, sell high.”
“The market is due for a downturn.”

Turn on any financial news channel and someone will tell you where the market is headed. Here’s the secret, and I won’t even charge you for it.

You ready?

Nobody knows.

Plenty of people claim to have the recipe and will point to the one time they called it right. They don’t mention all the predictions that never came true. Time in the market beats timing the market.

Figure out what you can afford to invest, and invest it consistently regardless of what the market is doing. That’s called dollar-cost averaging, and it’s one of the simplest ways to take emotion out of investing. (Like any strategy, it doesn’t guarantee a profit or protect against losses in a declining market.) Then stick with your plan.

6. Chasing Fads

Cryptocurrency. NFTs. Meme stocks. In recent years, there’s always been a new “can’t-miss” investment.

This isn’t new. In the 1600s, the price of tulip bulbs in Holland soared to absurd levels, then collapsed. Fad investments can make money, but they can also leave you with big losses. The hard part is knowing which fads will take off, and when to get in and out before the hype fades.

Don’t believe me? Try to find a successful investor who built their wealth by consistently picking the next big fad. Good luck.

If you enjoy hunting for a diamond in the rough, set aside a small amount you can afford to lose. Just don’t bet the farm on it.

7. Waiting Too Long to Start

“YOLO.”
“I don’t make enough to save for retirement.”
“As soon as we pay off [insert anything here], we’ll start investing.”

There’s always an excuse. Want to know the real secret to success? It isn’t waking up at 5 a.m., cold showers, or whatever Instagram influencers are selling this week. It’s giving up some short-term gratification to set yourself up for long-term rewards.

Compound growth works best when it has time. Warren Buffett bought his first stock at age 11, and the vast majority of his wealth was built after age 65. Even the greatest investor of our time owes most of his fortune to decades of compounding.

Look at any compound growth chart, and you’ll see the biggest gains come at the end. The best way to get there? Start earlier.

8. Raiding Retirement Accounts Early

Early withdrawals are one of the most expensive mistakes I see.

Say you’re 30 and take $10,000 out of your 401(k). You’ll generally owe:

• Federal income tax: 22% if that’s your bracket
• A 10% early withdrawal penalty
• Michigan income tax of 4.25%

That’s more than a third of your money gone before you spend a dime. Michigan’s retirement income deduction generally doesn’t help here, since it’s designed for retirement benefits, not early withdrawals.

And the bigger cost is what that money could have become. Left invested for 35 years until age 65 at a hypothetical 7% annual return, that $10,000 could have grown to over $106,000. Withdrawing early can mean working years longer than you planned.

A Michigan-specific note: if you’re a State of Michigan or other government employee with a 457(b) plan, withdrawals after you leave your job generally aren’t subject to the 10% early withdrawal penalty, even before age 59½. That can be a valuable planning tool, but it still needs to fit into your overall retirement plan.

Hey Rubber, Meet Road

Did you learn a few things or make a mental note to change some habits? Good. Now comes the hard part: putting a plan in place.

It’s hard to skip a fun vacation, eat in on the weekends, or settle for a smaller house. And when markets drop, it’s hard not to sell. The path is hard, but the payoff is worth it.

Legendary football coach Nick Saban often talks about discipline as doing what you know you should, when you should, whether you feel like it or not. I have a feeling Saban would make one heck of an investor.

Want a second set of eyes on your plan? If you’re in the Lansing area or anywhere in mid-Michigan, schedule a no-cost, 30-minute conversation and we’ll talk through where you stand and what to do next. You can also find more articles like this in our Learning Center.