5 Thoughtful Ways You’re Sabotaging Your Portfolio as a Beginner Investor

Investing is one of the most effective ways to build wealth over the long term, but it’s not as simple as throwing money at any old asset and calling it a day. It takes a bit of strategizing and a little bit of effort on your part to make the most of your money.

If you’re a beginner investor and feel you’re operating below where you’d like to be, let’s look at five ways you might be sabotaging your efforts.

1. You’re not prioritizing tax-advantaged accounts

Prioritizing tax-advantaged accounts such as individual retirement accounts (IRAs) and 401(k)s is crucial for maximizing your investment returns while minimizing tax liabilities.

These accounts offer significant tax benefits, including tax-deferred or tax-free growth — which can accelerate your savings’s growth over time — tax-deductible contributions and tax-free withdrawals in retirement. Albert Einstein has supposedly referred to compounding as the eighth wonder of the world: “He who understands it, earns it. He who doesn't, pays it.”

Compounding, particularly in the absence of taxation, can help you maximize your investments. For example, investment gains in a Roth IRA can compound without being eroded by taxes along the way. Unfortunately, only a fifth of respondents say they invest in stocks through an IRA, according to Finder’s Consumer Confidence Index. 

If you’re worried that a tax-advantaged account will offer fewer investment options than a taxable brokerage account, that’s not true. While 401(k)s are typically limited to mutual funds, most assets are permitted inside an IRA — everything except collectibles and life insurance. You just need to compare brokers to find the best IRA for you — one that offers the investment options you want to hold in your portfolio.

2. You think all brokers are the same

They’re not. By mindlessly sticking with one broker, you might overlook better pricing structures, access to a wider range of investment products and fewer miscellaneous fees that quietly erode your portfolio balance.

Without exploring alternatives, you risk being locked into a subpar platform that limits your ability to optimize your portfolio for better returns — and missing out on a better investing experience altogether.

3. You’re inflating your investing experience and skills

A particularly eye-opening statistic shows that over the 20 years ending 2015, the average investor only earned 2.1%, compared to the S&P 500’s average return of 8.2%. Why the discrepancy? Well, timing the market, a fool’s errand more often than not that involves buying and selling an asset based on estimated price fluctuations, likely plays a role. Additionally, picking and choosing stocks to outpace the S&P 500 is incredibly difficult. 

When most professional investors struggle to beat the market, if you too are picking stocks under the belief that you have an edge or you’re trying to time when the market will rise or fall, it’s probably time you heed Warren Buffett’s advice that the best option for regular investors is to buy and hold low-cost index funds.

4. You’re trading noise, not investing based on rational decision-making

A noise trader is an investor who makes trades based on irrelevant or irrational factors, such as emotions, rumors or short-term market trends, rather than on fundamental analysis or rational decision-making. If you add individual stocks to your portfolio, apply a sound investment strategy.

That isn’t to say you shouldn’t speculate. If you want to chase hot investment trends or invest based on rumors from an anonymous forum poster, just go into it prepared to lose it all. Commit only a small percentage of your portfolio to trading noise.

5. You’re leaning too heavily on safe investments when you have a long time horizon

Investing is a spectrum, as it encompasses a wide range of approaches, strategies and risk levels. Conservative investments such as bonds and money market funds sit at one end of the spectrum, offering lower returns but lower risk. On the other end are more aggressive investments, such as stocks and cryptocurrencies, which have the potential for higher returns but also higher risk. Between these extremes are various investment options with differing risk-return profiles, allowing investors to tailor their portfolios to their individual goals, time horizons and risk tolerance. 

But investing too safely has its downsides. Safe investments may not outpace inflation, leading to a decrease in purchasing power and the risk that the real value of your savings erodes over time. Safe investments beat the downsides of avoiding investing entirely and should be a part of a well-diversified portfolio, but it's essential to balance safety with growth potential to optimize investment outcomes.

Bottom line

Between the uncertainty of which investments to choose, the difficulties of navigating the complexities of the financial markets and emotional reactions to market fluctuations and trends, beginner investors have a lot on their plates. But part of the investing journey is learning what to do and what not to do. Hopefully, these points help you along the way. 

About the author:

Matt Miczulski is an investments editor at Finder. Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.

Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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