I’ve been investing in the stock market for close to a year and a half now and I’ve learned a lot during this time period. Now granted, there are people that have been in the stock market for much longer than me and who have made a lot more money than me, but they don’t have a fresh memory of their “rookie year”. It’s all pretty recent so you could say I’m basically an expert at stock market rookies mistakes :). Looking back I know where I could improve and what easy mistakes I could have avoided.
Now, like always, I gotta let ya know. This isn’t financial advice, I’m not a financial advisor, and ultimately you need to do your own research. I’m just writing down my ideas and hopefully something here is informative for you in some way, shape, or form.
I also want to make clear that I have outstanding debt, many people think you can’t invest until you are completely out of debt, or at least have everything paid off besides your mortgage.
The perspective I’m coming from is that I actually use investing in individual stocks (not retirement plans like 401k, etc.) as a form of savings, and because of this, it can change the approach towards investing. Essentially, if you are completely (or mostly) debt free or already “rich” then investing in the stock market, at least in the short term, can be viewed a bit differently.
But most people I know are in debt, and most people don’t invest in the stock market, at least in individual stocks. So if you’re new to this, then there is a good chance that you’re still in debt while also investing. That being said, let’s get into it.
Stock Market Rookie Mistakes (In Order)
1. Buying on Margin
Buying on margin is one of the riskiest things you can do. In short, margin is basically borrowing money from a brokerage to buy stocks. You have to pay interest on this, which a lot of times can run about 8% but can vary depending on various factors.
That interest rate alone is enough to make it risky, but that’s not the riskiest part of margin trading. The primary reason why this should be avoided at all costs is simple: margin calls.
If you get a margin call that means you’re forced to either add money to your account, or sell your stocks.
Now, a lot of beginner stock market investors get into margin and this is where the small fish, at least in the long run, lose to the big guys.
You’re never forced to sell your stocks when they’re going up, only down. Why? Because you have to keep your account at a certain balance to keep the margin you have. If your stocks lose value then your margin percentage is going up, and this is where you’ll get those beautiful margin calls.
My experience with margin is both good and bad….but mostly bad. Originally I had no idea how margin calls worked (which is exactly why I shouldn’t have been using margin in the first place) and was forced into a margin call, just like I mentioned above. This is definitely not good.
This is an example of “buying high” and “selling low”, not because you wanted to, but because you were forced to.
Now, for some reason I didn’t learn from this LOL and got into margin again earlier this year, however, it actually worked out. I “bought the dip” using margin to where most of my stocks have moved up quite a bit since then.
This, however, was so risky that for me personally probably wasn’t even worth the risk. Yeah, I made money, but the stress of having that margin debt was ridiculous.
The moment I sold stocks and added enough funds to get out of margin my stress levels immediately dropped. Lesson learned, don’t get into margin, and if you do, make sure it’s a small percentage and that you can pay it off in a short amount of time.
2. Buying When You’re Over Leveraged
This goes hand and had with buying on margin, but in other words, if you’re in too much debt and under on your bills, it probably isn’t a good idea to buy stocks. Basically, you’re gambling. It’s tough to know what is going to happen in the short term with just about any stock. If it’s hard to make your obligations then you could put yourself in a position where you have to sell your stocks to cover your debt obligations as they come up.
You want to have some discretionary income first before you start investing. So if your bills total $4,000 a month and you’re income is $4,200 a month then that doesn’t give you much room to buy stocks. Not that you can’t invest, but if you do then this is where it may be a good idea to look at “safer” investments or maybe just build up some cash first.
Now I mentioned that I actually buy and hold individual stocks as a form of savings, but it’s important to invest in things that aren’t highly volatile as you don’t want to lose value in stocks and be forced to sell in a bad situation where you’re under on your investments.
You also want to look at the rates you’re paying on the debt you have. It just rarely ever makes any sense whatsoever to invest in stocks if you have credit card debt with high interest rates.
3. Not Actually Knowing the Company You’re Buying
This is definitely a common theme among beginner mistakes. Instead of buying a company and whatever it is they are actually producing, you’re just looking at trend lines and “buying low” hoping a stock will shoot up…without really knowing anything about a company.
You need to actually be investing in stocks that you think will grow in the future, increase revenue, and carve out a market in the industry they’re in. Not just simply “it’s low now, it should go up”.
This, can work out, but if you’re just investing in companies at 52 week lows for example, they might just be at a low for a good reason, and keep going lower. Look at the numbers that are actually important, not just the trend line.
4. Buying at the Wrong Time (In the Market)
Now it’s tough to understand valuations that well when you first start investing in stocks, but you’ll likely have a good idea (subconsciously) on whether it’s a good time to buy, or a bad time to buy.
That being said, even experienced investors have a hard time “timing the market”. They say it’s basically next to impossible to do. But what I’ve noticed is there there were clear signals on good buying times and poor buying times while I’ve been investing.
Basically, the more over leveraged you are, the more you have to consider this, but obviously either way you want to buy at good time, not before your investments are about to fall off a cliff and lose value.
Looking back, however, there were times where certain investments were literally screaming at me “buy, buy buy!!!” Those are the times we should be buying.
I’ll give a couple examples here.
First off, March/April/May of 2020 we saw the entire stock market drop off a cliff then start to turnaround. This is when I first started investing. I mean it just seemed so obvious to me that the valuations on stocks were outstanding and at some point they would go back up. And it turned out that pretty much anybody who threw money into the stock market last year made a ton of money.
2021 hasn’t been the same. We’re no longer just throwing fish in a barrel and it’s a bit harder to find the gems.
Now, I still think these opportunities still come up in just about any market, they are just harder to find.
Example number 2. A stock I was buying (SWCH) dropped massively from about $18 to under $14 in just a few days back in March of 2021 based mostly off of some insignificant news.
Now nothing had fundamentally changed about the company and overall it seemed completely obvious to me that this sell off was an overreaction. I bought in quite a bit around $14 and just a few months later the stock hit a high of $21.98 and as I’m writing this sits at $20.85. So that’s a pretty quick 35% run up.
This is a prime example of timing the market or “buying the dip”. It was just one of those scenarios where it just seemed like the likelihood of it having a nice turnaround seemed to be about 90+ %. I’ve had a few of these come up and my only regret every time is that I didn’t buy more.
Now, unfortunately, I’ve also had to learn from my mistakes here as I’ve bought stocks as well as they were overvalued (at least short term), then only to see them drop down to a point where I really wished I could buy, but couldn’t because I had no cash left to do so.
You’re never going to completely time the market right, but it’s always a good idea to have a game plan on where you actually think it’s worth it to buy a specific investment and then follow through on that plan.
That’s mainly what I do now, I set price points for investments and I don’t buy them until they hit that price point. The lower a good stock drops, the better the buy is.
5. Not Diversifying Your Portfolio
Putting all of your eggs in one basket, typically isn’t a good idea. Now, that being said, if you happen to pick 1 amazing investment, then you’d technically be better off only buying that 1 investment over all of your other investments that didn’t perform as well.
But, the less stocks you hold, the more risk you’re holding, and while many investors suggest holding hundreds of stocks to lessen your risk, I think this makes it less “hands on”, and also mitigates your upside.
That being said, picking a nice selection of stocks helps build a good overall portfolio. Typically having a blend of various market caps and industries is good approach.
At the time of writing this I hold 16 different stocks (and 15 different cryptocurrencies), while I’ve probably held 40 or 50 total stocks the last year and a half.
Spreading these stocks out into various industries means you mitigate your losses if one industry falls over for a period of time. I like to choose some of my favorite stocks in various industries.
6. Avoiding “Boring” Investments
It’s easy to get excited about highly volatile stocks or even cryptocurrencies considering their massive upside.
This “to the moon” philosophy is great when it works out, but unfortunately most the time it doesn’t. For every big winner there will likely be several swings and misses. Now, this isn’t to say you shouldn’t invest in these but you need to be aware of the risk involved and not only think about the potentials gains but the potential losses.
For us “normal folks” who have other outstanding debt and more less live paycheck to paycheck, if you have to sell your investments at some point to pay for something that comes up, then you’re really risking your money if you invest in stocks that can bounce up and down drastically. Imagine you putting 5 grand into Bitcoin at 64k and it drops (rather quickly) to half that…your 5 grand just turned in to 2.5k if you are forced to sell it.
We don’t want that.
Building a foundation in less risky stocks is probably where everyone should start, at least if we’re talking about putting in large amounts of money.
So what kind of money am I talking about here and what kind of stocks are we talking about? I wrote about investing in stocks as a form of savings, you can read about that here. The main take away is that if you have outstanding debt you can still invest in stocks, and this can even technically be your 3-6 months of savings.
But investing in companies that are lower risk is a very important aspect in doing this. What type of companies am I talking about? I’m talking about the ones everyone knows. Apple, Microsoft, Amazon, Facebook, or even an ETF like Berkshire Hathaway.
These are stable investments that are likely to make it through any market with a lot less volatility than smaller market cap companies.
Personally, I think keeping 2 months worth of “savings” is a good idea here. How much are your monthly expenses? Whatever that number is multiply it by 2, that’s a good starting point.
What I’ve learned is that I wished I would have just bought more of these instead of having to stress about crazy up and down swings on my riskier plays.
7. Selling too Soon
It’s important to have a plan ahead of time on where you see your investment going and when to take profits. I learned this the hard way.
Here’s what happened.
In 2020 a lot of my stocks had taken off and I had gotten to a number where I was able to pay off a loan. I paid off the loan. Yes!! Knocked out some debt, right?
Well…even though a lot of my stocks had 3x’d or more at this point. Many had yet to play out. A lot of these ended up doubling pretty quickly just months after I sold them. Now, the interest I was paying on the loan at that time wasn’t close to what I would have earned if I didn’t sell my stocks. Mathematically, I lost big time.
There are no guarantees what will happen with your stocks.
However, if you have a game plan on where you think your investments are going. Don’t fold your hand early! Let them play out unless some new information has came to light that makes you actually change your mind.
It wasn’t necessarily just the fact that I sold to pay off debt that was the mistake, it’s that I didn’t follow my game plan. My original plan was to hold them until a certain point into 2021 and instead I folded my hand prior to that. A lesson learned the hard way!
8. Not Taking Profits
Now just the same, while you shouldn’t sell to early, you also need to take profits! Again this comes down to having a game plan and sticking with it.
Sometimes it’s great to buy stocks and just hold them for years.
But sometimes you realize an investment has had a nice run and that you shouldn’t get greedy. It’s important to think logically though. You never just sell because it’s made a run, especially if you believe it will grown long term, but sometimes even a good stock can be overvalued.
An example of this would be Tesla. In 2020 it had an amazing run and had nearly reached a trillion dollar market cap. Now, even though Tesla is a great company this is a valuation that even some of the biggest Tesla bulls thought was too high.
It took a nice dive from just over $900 down to $539.49, and since has mostly hovered in the $600 range. It currently sits at $645.57 as I am writing this with a market cap of 621 billion.
Now, a year from now, who knows maybe it will be well over a trillion dollars, but for the time being it was an overvalued stock. People who took profits in the $800 range won big, at least in the short term.
9. Being Afraid to Cut Your Losses
Now just the same, if you make a bad investment. You’re allowed to sell for a loss. There is nothing written that says you have to hold an investment just because you’re under on it.
In 2021 I started seeing some losses on some specific investments and there were chances I had to sell them when I was down but held on to this logic of “you don’t lose until you sell”.
Well. Sure.
That’s true, but at the same time if you just simply didn’t make a great investment, and even though it’s down is going to keep going down, then you’re obviously better off selling that investment.
Are there other areas where it would make sense to move your money? Is there another stock you think is better than the stock you’re losing on? In that situation it’s completely fine to sell your investment and move it over somewhere else.
That being said, it’s important not to sell a good stock that has just had a bad run. Sometimes that is the best time TO BUY. Again, it depends on that very moment, and what you think is the better investment right now.
10. Not Listening to Experts (Or Just Doing What They Do)
This, may be the most important one because much of what you’re reading here can be tied into this. If you don’t know what you’re doing you can always just follow people who do know what they are doing.
Simply copy them.
I know that sounds like cheating or something. But yeah, you don’t have invest in things you don’t know about, you can invest in things the great investors are investing in, or, better yet, you can invest in ETFs.
These are a blend of stocks much like a 401k. And you can invest in some of the best investors of our time’s ETFs. Like Warren Buffet (BRK.B) or Kathy Wood (ARKK).
Now, you may think this goes against what I’m saying about diversifying as this would limit your earning potential. But the bottom line is that in the long run, out investing great investors is unlikely, and you can buy and sell shares of an ETF just like an individual stock giving you the same flexibility of investing in individual stocks.
11. Not Dollar Cost Averaging (DCA)
I talked a lot about how investing at the right time is important. I’ve lost a lot of money on my investments by being too eager to buy stocks when they were overvalued, and I’ve made a lot of money by putting in a lot of money in at times when stocks were undervalued.
That being said. An investing strategy that many great investors suggest is to just dollar cost average.
This is simply referring to investing a specific amount of money into the market at regular intervals. So for example. If you get paid weekly. You could just invest $100 every week (or whatever amount you can).
This basically takes the stress out of “timing the market”. You can do this with 1 specific investment, however, we’ve talked about how diversifying is important.
This gives you a great way to dollar cost average. If you have 20 different stock investments you’re investing in, then each time you get paid you could choose to invest in whichever stock looks like the best valuation.
OR, you could simply just add X amount each time you get paid into your brokerage account and not actually buy any stocks if you think the entire market is overvalued. This would give you cash on hand to buy during great buying opportunities.
Some people do this waiting for a market correction. Ultimately, you can choose whatever strategy you want that you feel is best for your situation.
12. Not Having a Game Plan
All of this simply comes down to having a game plan. Investing without a specific game plan kind of sums up all of these “rookie mistakes”. Now, of course when you first jump into things you’re probably not going to know exactly what to look for.
You simply learn as you go.
But hopefully, based on your specific situation you can start investing with a specific plan. If you just blindly start throwing money into the market without budgeting what you can spend and how you want to spend it, then this could ultimately put you in a bad situation where you lose money investing in the stock market.
Steps 1-11 are basically that. A guide to help build your game plan.
Conclusion
Making “rookie mistakes” in the stock market is easy to do. And even with years of experience you’re going to continue making mistakes. It’s all about getting better with time though.
Hopefully, this article gives you some insight into some easily avoidable mistakes that you don’t have to make in while starting to invest in the stock market.
What about you? Are you starting to invest in the stock market? Have you already made some of the beginner mistakes? Did this article give you any insight into stock market investing? Is there anything here that I missed?
Let me know in the comments below!