This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Investing in the stock market can be challenging, and nobody has all the right answers. Also, because investing is a long-term strategy, sometimes you won't see the repercussions of mistakes until it's too late.
If I could go back in time, there are several things I'd change about my own investing journey. Here's how you can avoid making the same mistakes I did.
1. I waited too long to start investing
When I first started saving money, I put everything I had in a savings account. That's 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 contributing to a savings account well after I had an established emergency fund because I thought it was safer than investing. In reality, I missed out on valuable time to let my money grow.
Over the long term, keeping your money in a savings account can be costly. Even the best accounts only have interest rates of around 1% to 2% per year, which isn't even enough to keep up with inflation -- so your money could actually lose value over time.
By investing in the stock market, though, you can earn average returns of around 7% to 10% per year over time. Although it can be daunting, investing your money rather than simply saving it can help you earn exponentially more over the long run.
2. I made withdrawals from my retirement account
When I eventually did start investing, I still treated my retirement fund like a savings account. I assumed that since it was my money, I could withdraw it at any time for any reason. I also figured that since I won't need my retirement savings for decades, withdrawing a little here or there wouldn't make a difference.
However, there are drawbacks to making early retirement fund withdrawals. For one, if you take money from a 401(k) or traditional IRA before age 59 1/2, you could face taxes and penalties on your withdrawals.
Also, even small withdrawals can affect your long-term savings. Compound interest is the driving force helping your money grow, and it essentially involves earning interest on your entire account balance rather than just your initial investment. The higher your balance, then, the more you'll earn in compound interest and the faster your money will grow.
When you make withdrawals, though, it's harder for compound interest to do its job. Repeated withdrawals over time can have a more significant effect, potentially costing you thousands of dollars in missed earnings.
3. I worried too much about the market
When I first began investing, I would obsessively check my account balance every day to see how much my savings had grown. But whenever my balance went down even slightly as a result of normal market fluctuations, I would panic and stop investing.
By now, though, I've learned that market volatility is normal and day-to-day fluctuations don't really matter. What does matter is the market's long-term performance.
To this day, I rarely check my account balance -- especially when the market is in a slump. I've set up automatic contributions so that a set amount of money is transferred from my bank to my retirement account each month, and I don't even think about how my investments are performing on a day-to-day basis.
Investing in the stock market is a long-term strategy and over time, the market has consistently earned positive average returns. By staying focused on the future, it can be easier to avoid getting hung up on the market's short-term volatility.
Investing isn't always easy, but it's also one of the best ways to generate long-term wealth. While nobody has all the answers, a good strategy can help you earn as much as possible over time.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
