5 Investing Mistakes to Avoid

Quick Answer

You can avoid common investing mistakes by diversifying your portfolio, reviewing account fees and understanding your employer match amount.

A hand with gray nail polish has their phone screen showing a stock chart while they are using a laptop in the background.

Investing can be a powerful way to build your nest egg and boost your wealth, but it isn't an exact science. It's an inherently risky endeavor that can lead to both gains and losses, and even the most seasoned investors make some mistakes along the way. This is all to say that financial missteps can cost you.

We've rounded up a handful of common pitfalls to avoid. Here are five of the biggest investing mistakes—plus tips to help you sidestep them.

1. Trying to Time the Market

Investing in individual stocks can be a tricky game. When you buy shares of a publicly traded company, you'll have an ownership stake in that organization. The idea is to sell shares for more than you paid for them so you can turn a profit. (Keep in mind, capital gains tax will likely apply to your earnings.)

One of the most common stock investing mistakes is trying to time the market so that you're buying and selling at the exact right moment. The stock market is constantly in flux, and a wide variety of factors can impact stock prices. Earnings reports, industry trends, scandals, economic conditions and political developments can all push stock prices up and down. Emotions can also play a very real role. When the market dips, you might react fearfully and sell at a loss.

And then there's deciding which stocks to buy. Many investors hope to get in on the next big thing before it takes off. Everyone wants to be like the lucky folks who bought shares of Amazon or Apple in the early days, but not all companies are destined for success.

Instead of going all in with individual stock picking at the exact right time, you might consider mutual funds and exchange-traded funds (ETFs). Each represents a basket of investments that allows you to buy and sell smaller shares of stocks, bonds and other securities. This helps dial down risk because, if one stock or sector underperforms, you have other holdings in your portfolio to help make up the difference.

2. Failing to Diversify

Diversification is meant to spread out investment risk so that all your eggs aren't in one basket. For example, if the bulk of your investments are in individual stocks within the tech sector, what will you do if there's an industry-wide lull? Or if your top-performing shares unexpectedly drop in value? If you aren't diversified, it could lead to significant financial losses. Investing in ETFs, index funds and mutual funds is one way to diversify your portfolio.

While stock investing, real estate and cryptocurrency are considered high-risk investments, you can balance your portfolio with low-risk assets like bonds, certificates of deposit (CDs) and money market accounts. Safer investments typically generate modest returns, but they can provide some much-needed stability. It's something to think about when choosing the right asset allocation. Diversifying can help mitigate risk and position your portfolio for long-term growth.

3. Paying High Fees

One of the biggest investing mistakes is overlooking potential costs. Here are a few ways you could encounter fees as an investor:

  • Trading commission: When investing in ETFs, some brokers may charge a fee of up to $25 per trade. Others may not charge a trading fee at all, so it pays to shop around.
  • Operating expense ratio: Mutual funds and ETFs both charge a fee to cover administrative costs and portfolio management. This fee is charged as an annual rate and is calculated as a percentage of your investment. Mutual funds are actively managed, so their operating expense ratios tend to be higher than ETFs.
  • Robo-advisor fees: A robo-advisor is an automated advisor that recommends and manages your investments based on your risk tolerance and financial goals. They're usually more cost-effective than working with a financial advisor or fund manager, but they aren't free. Some charge annual management (or advisory) fees that can range from 0.20% to 0.50% of your account balance.
  • Financial advisor fees: You may prefer to have a financial advisor manage your investments on your behalf. Management fees here are generally around 1% to 2%, which can add up as your portfolio grows.
  • Brokerage account fees: If you invest through a regular brokerage account, you may be charged account maintenance fees. There might also be fees for buying and selling investments.

4. Missing Out on an Employer Match

Over two-thirds of private industry workers had access to employer-sponsored retirement benefits in 2021, according to the U.S. Bureau of Labor Statistics. If you invest in a 401(k) through work, your company may match some portion of your contributions. Many employers offer this perk to incentivize saving—and it's essentially free money.

Let's say your annual salary is $100,000 and your employer will match 50% of your contributions up to 4% of your salary. If you kick in the full 4% per paycheck, it would automatically unlock another 2% from your employer. That's an extra $2,000 per year. Leaving this money on the table is a common investing mistake. Aim to contribute at least enough to snag an employer match.

5. Over- or Under-Investing

Before you begin funneling money into investments, you'll want to make sure you're standing on solid financial ground. If you're struggling to cover essential expenses, don't have an adequate emergency fund or have excessive debt, investing might not make the most sense. While the stock market has produced an average annual return of 10% since the 1920s, average credit card APRs are over 16% at the time of this writing. Numbers like these suggest that paying down high-interest debt is more prudent than investing.

Under-investing can be just as toxic to your wealth. According to a recent Gallup survey, 42% of Americans are not invested in the stock market. But with the average APY on a savings account just 0.08%, holding too much cash means missing out on potentially better returns. Understanding the basics of investing can help demystify the process. You might also partner with a financial professional who can help you craft a personalized investment plan.

The Bottom Line

There's no one-size-fits-all strategy for investing, but understanding the biggest investment mistakes might very well show you what not to do. Just remember that what works for one investor might not be the best strategy for another. Your financial goals, risk tolerance and age will all come into play.

In the meantime, keeping your financial health strong is always a good idea—especially if you're hoping to be more intentional about investing. To help you out, Experian provides free access to your credit score and credit report, when you need it.

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