The Motley Fool

5 common mistakes young investors should avoid

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Family holding hands in a circle on a beach
Image source: Getty Images.

Beginning your investing journey as early in life as possible is vital if you’re to take full advantage of compound interest. Thanks to what Albert Einstein declared the “eighth wonder of the world,” getting into the habit of making even modest monthly contributions can go a long way to building a sizeable nest egg to spend later on.

That said, what you manage to avoid doing as a young investor is just as important. Here are five mistakes that could negatively impact on your chances of growing rich from the stock market.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

1. Failing to invest according to your time horizon

Before throwing your money at the market, it’s essential to have some idea of how long you intend to stay invested for. Clearly, those in their 20s and 30s are at a significant advantage over more mature market participants with the former able to greet any downturns with a shrug of the shoulders.

Nevertheless, given the unpredictability of equities over the short term, the stock market is probably not the best destination for your cash if it’s likely you’ll need access to it within only a couple of years in order to, say, pay a deposit on a property. 

2. Ignoring the small-cap premium

Thanks to the relative volatility of their share prices, any strategy that involves investing in smaller businesses is traditionally regarded as riskier than buying a selection of companies in the FTSE 100.

However, studies have consistently shown that small companies vastly outperform their larger peers over the long term. Performance over the short term hasn’t been bad either. Last year, the Numis Smaller Companies index (which tracks the bottom tenth of the UK stock market) returned just under 19% compared to the 11% achieved by the FTSE 100.

As such, younger investors should consider keeping at least some of their capital in a diversified group of market minnows.

3. Withdrawing and spending dividends

This one’s simple. Dividends are wonderful to receive but they’re also tempting to spend.

Given that the huge proportion of eventual returns are made from these payouts, the best thing young investors can do is simply re-invest what they receive straight back into the market.  

Easy? Perhaps not but the best investors tend to be the most disciplined.

4. Not holding shares inside a tax-efficient account

Since the average retirement age is only heading in one direction, it’s possible that some people in their 20s will want to retain their equity holdings for the next 50 years. The only problem here is that capital gains tax will likely take a sizeable proportion of whatever profits are realised when the time comes to sell.

While we can’t be sure how taxation will change in the future, i’st best to do what you can now to minimise the amount that needs to be given back later. Consider holding all your investments in a stocks and shares ISA or a self-invested personal pension (SIPP). Whatever you make will then be protected.

5. Failing to stay calm

While this could apply to all investors, it’s particularly pertinent to those still young. So long as you’re committed to staying invested for decades, it’s absolutely vital to cultivate the ability to refrain from panicking when others are biting their nails and reaching for the sell button. Your future self will thank you for it.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.