Investing in the stock market can be a challenge and no one has the right answers. Also, because investing is a long-term strategy, sometimes you won’t see the consequences of making mistakes until it’s too late.
If I could go back in time, there are a few things I would change in my own investment journey. Here’s how you can avoid the same mistakes I made.
1. I waited too long to start investing
When I first started saving money, I put everything I had into a savings account. This is not necessarily a bad idea, because a savings account is often the best place for an emergency fund and other short-term savings.
However, I continued to contribute to the savings account long after I had set up an emergency fund because I thought it was safer than investing. In fact, I missed valuable time to allow my money to grow.
In the long run, keeping your money in a savings account can be expensive. Even the best accounts only have interest rates of around 1% to 2% per annum, which is not even enough to keep up with inflation – so your money can actually lose value over time.
However, by investing in the stock market, you can earn an average return of about 7% to 10% per year over time. While it can be daunting, investing your money, not just saving can help you earn exponentially more in the long run.
2. I made withdrawals from my pension account
When I finally started investing, I was still treating my pension fund as a savings account. I figured that since this was my money, I could withdraw it at any time and for any reason. I also decided that since I wouldn’t need my retirement savings for decades, there would be no difference in withdrawing a little here or there.
However, there are shortcomings in making withdrawals from early retirement funds. On the one hand, if you take money from a 401 (k) or traditional IRA before turning 59 1/2, you may face taxes and penalties for your withdrawals.
In addition, even small withdrawals can affect your long-term savings. Compound interest is the driving force that helps your money grow and essentially involves earning interest on the entire balance of your account, not just your initial investment. The higher your balance, the more you will earn from compound interest and the faster your money will grow.
However, when you make withdrawals, it is more difficult for the compound interest to do its job. Recurring withdrawals over time can have a more significant effect, potentially costing you thousands of dollars in lost profits.
3. I was too worried about the market
When I first started investing, I obsessively checked my account balance every day to see how much my savings had increased. But when my balance sheet declined even slightly as a result of normal market fluctuations, I panicked and stopped investing.
So far, however, I have learned that market volatility is normal and daily fluctuations don’t really matter. What matters is long-term market performance.
To this day, I rarely check my account balance – especially when the market is in decline. I have set up automatic contributions so that a certain amount of money is transferred from my bank to my pension account every month and I don’t even think about how my investments are presented on a daily basis.
Investing in the stock market is a long-term strategy and over time the market consistently gains a positive average return. By staying focused on the future, it may be easier to avoid short-term market volatility.
Investing is not always easy, but it is also one of the best ways to generate long-term wealth. Although no one has all the answers, a good strategy can help you earn as much as possible over time.