5 Painfully Common Investing Mistakes to Avoid Right Now

There’s no such thing as a perfect investor. Even the most seasoned investing experts make bad investments every now and then. However, good investors understand that some fundamental mistakes can (and should) be avoided to make you a better investor.

Here are five painfully common investing mistakes to avoid.

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1. Underestimating the power of compounding

In investing, one of the best resources on your side is time — the earlier you begin investing, the better. Time is so important because of compounding, which occurs when your investment returns begin to earn returns of their own.

To illustrate the power of compounding, let’s imagine a scenario where your investments return 10% annually (the historical average annual return of the S&P 500). If you contribute $500 a month, here’s how much you’d roughly accumulate at different points in time:

Monthly Contribution Years Account Total
$500 10 $95,600
$500 15 $190,600
$500 20 $343,600
$500 25 $590,100
$500 30 $987,000

Chart and calculations by author.

In this scenario, although it will take 10 years to potentially accumulate $95,000, it will take only five more years to almost double that amount. Although you managed to gain $153,000 in the five years between year 15 and year 20, in the five years between year 25 and year 30, your investment will possibly gain over $396,000. That showcases the true power of compounding.

2. Ignoring an index fund’s expense ratio

Even though you won’t be charged to purchase an index fund, you’ll pay an expense ratio, which is charged annually as a percentage of your total investment. If an index fund has a 0.50% expense ratio, you’ll pay $5 per $1,000 that you invest. If the expense ratio is 0.25%, you’ll pay $2.50 per $1,000 invested.

A small difference in percentages may not seem like much but can really add up over time. Just a difference in a quarter of a percentage point can add up to tens of thousands in the long run.

3. Keeping up with a stock’s…

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