Investing in mutual funds is one of the most popular and accessible forms of capital investment. It combines relative simplicity with the potential for attractive rates of return, especially for people who do not want to or cannot spend a lot of time analyzing financial markets on their own. However, even the best product does not guarantee success if it is accompanied by poor investment decisions. Below, we discuss the 5 most common mistakes beginner traders make — and how to avoid them.
Lack of a clearly defined investment objective
Why is this a mistake?
Many investors start their adventure with funds following the general assumption: “I want to multiply my savings”. This is not enough. Without a clearly defined investment goal, it is difficult to assess which products are suitable, how long to invest and what strategy to adopt.
Examples:
– A person investing for retirement should think about the long-term horizon and not react to short-term market fluctuations.– Someone planning to buy an apartment in 3 years may need a more defensive portfolio, as they may encounter an unexpected market discount.
What to do?
Define precisely:– the purpose of the investment (e.g. pension, own contribution to the loan, child’s education),– time horizon,– expected rate of return,– acceptable risk.
Ignorance of one’s own risk tolerance
Why is this a mistake?
Investment funds differ in their level of risk. Lack of awareness of one’s own risk aversion may lead to the purchase of funds, the volatility of which will be unbearable for the investor. Donald Trump’s tariff war has set a good example for us. The markets fell several percent in the short term, causing panic among investors. Those who could not withstand the nervous pressure and sold off their assets lost money. The markets also fell sharply, and reacted strongly to the sell-off.
Consequences:
– Nervous checking of quotations every day.– Selling the fund at the time of declines – realizing the loss.– Lack of consistency in investing.
What to do?
– Complete a profiling test (available on most investment platforms).– Think about how you will react if the fund falls by 10%, 20% or even more.– Choose products that match your profile (cautious, balanced, aggressive).
Postponing the decision to start investing
Why is this a mistake?
Many beginner investors are waiting for the “perfect moment” — and it usually doesn’t come. As a result, the funds remain in interest-free accounts or inflation eats them up. Stock markets grow in the long term, just like companies in the real economy. The development of companies is practically equivalent to an increase in the share price of these companies.
Example:
A person who started investing 5 years ago probably has much more capital today than one who is still waiting “for the markets to calm down”.
What to do?
– Start investing regularly, even with small amounts.– Consider the DCA strategy (known from the American market: Dollar-Cost Averaging) – investing a fixed amount every month, e.g. in a dividend company fund.– Remember about the power of compound interest.
Lack of diversification of the investment portfolio
Why is this a mistake?
Concentrating resources in one fund, one sector or one country can be disastrous in the event of unforeseen events. Diversification is the foundation of effective risk management. I will add – wise diversification.
Example:
Investing exclusively in a technology stock fund in 2021 performed well – but those same investors may have suffered big losses in 2022 as the sector corrected.
What to do?
– If you have no experience, build a portfolio of several funds that differ in asset class (bonds, equities, developed and emerging markets).– Consider global funds (with the participation of the strongest countries (e.g. the US) or balanced funds.– If you have no experience, choose a mixed or lifecycle fund.
Investing under the influence of emotions
Why is this a mistake?
Financial markets are cyclical — they go up and down. Investors who act impulsively often buy funds after increases (when they are expensive) and sell in panic when they fall (when they are cheap).
Example:
During the COVID-19 pandemic, many investors sold their units after several percent declines. Meanwhile, within a few months, the markets recovered — and brought high profits to those who withstood the pressure.
What to do?
– Stick to an investment strategy – set coolly, not emotionally.
– Avoid checking the valuation of funds every day. – Remember: the worst financial decisions are made in emotions.