Just as useful as knowing what to do with respect to investing is knowing what not to do. In fact, some of the core investing principles that I teach involve pitfalls to avoid: don’t pay high fees, don’t jump in and out of the market, don’t delay, etc. This article details 11 common investor behaviors and choices that are detrimental. Don’t make these investing mistakes!

Wait to Get Started

There’s a common aphorism on investing: “It’s not timing the market, it’s time in the market.” We’ll get to market timing as an investing mistake later in this post; for now focus on the time in the market.

Once you are financially and mentally ready to invest, get in the game! Do not wait on the sidelines for months or years on end! On average, waiting means you’ll miss out on gains. The math of the power of compound interest show you just how damaging it is to miss out on even a year of returns.

Remember my example showing how the investments you make just during graduate school can translate to $1,000,000 in retirement? Instead, let’s say that you invested over your final four years of grad school instead of five. Your ending balance drops by $225,000!

Further reading:

• Are You Ready to Invest Your Grad Student Stipend?
• Whether You Save During Grad School Can Have a $1,000,000 Effect on Your Retirement

And on that note, one particular mistake that might cause you to wait to get started is that you…

Get Stuck in Analysis Paralysis

I’ve made this mistake more than once with my investments! Investing is an intimidating subject to approach for a novice. But investing isn’t complicated! (Some people like to make it (seem) complicated, but that isn’t better than a simple approach.) I’ll boil it down for a long-term goal like retirement: Buy a stock index fund and hold it until you need the money in retirement.

OK maybe you want a little more detail on that, but you don’t need much more before you get started! Really, you can learn all you need to know about investing in a couple hours. (If you’re super interested, keep going, of course, but you don’t have to.) After that, just start! You can refine and improve your strategy along the way if you want to as you learn more.

Think You (or Your Broker) Knows Better than the Market

Think you can beat the market or place your money with the person who can? Think again. After costs are taken into account, in a given year the vast majority of both individual investors and professional fund managers fail to even match the returns of the broad market sector they’re invested in. And to beat it year after year after year? Vanishingly rare.

The Efficient Market Hypothesis (EMH) states that it’s impossible to beat the market because share prices always account for all known information about each investment. There are no market inefficiencies to exploit through market timing or precise selection of individual investments.

The EMH is a theory and up for debate, but there is little evidence that contradicts it. Even the most well-known investor in our time to consistently beat the market, Warren Buffet, recommends the S&P 500 index fund, which simply tries to represent the market sector of large-capitalization stocks (source).

This is good news for those prone to the previous mistakes: there is little analysis needed to invest in index funds, and therefore you can skip the paralysis and jump right in.

Save Too Little

According to the EMH, you can’t control your investment outcome; the best you can do is match your (sub-)asset class of choice. What you can dial in are costs (more on that later) and your savings rate.

Given a certain rate of return on your investments, what’s the best way to double the amount of money you have in retirement? Save twice as much. Your savings rate is a linear scaling factor in the math of compound interest.

If your goal is to fund your retirement/become financially independent, you need to build up a very large nest egg. It takes decades to save what you need and to allow compound interest to work its magic. So in addition to starting early, save at a very healthy clip: 10% of your gross income is a great goal if you start in your 20s, more if you start in your 30s.

Bonus: The higher your savings rate, the smaller your goal savings amount. If you want to reach financial independence, you should save up approximately 25 times your yearly living expenses (following the 4% safe withdrawal rate). The more you reduce your living expenses, the smaller the nest egg is that you require to retire and the faster you’re able to save up to reach it. For example (given certain assumptions), increasing your retirement savings rate from 15 to 20% means that you can reach financial independence 6 years sooner. Jumping your savings rate up to 30% shaves an additional 9 years.

Further reading: The Shockingly Simple Math Behind Early Retirement

I know a retirement savings rate of 10-15% a big ask while you’re in grad school or a postdoc. If starting early and saving only a little have to play off against each other, start early with whatever rate you can. Just know that you’ll need to jump it up when your income increases.

Get Sucked in by Gimmicky Fintech

One of the great advances in personal finance in the last several years is the explosion of “fintech” or financial technology. Fintech has enabled small investors to access some services and benefits that were only previously available to higher net worth investors because financial advisors have been able to scale their services.

These fintech platforms are now heavily advertising to their new potential clients, i.e., you. While more choices for regular people with respect to investing is a good thing, this heavy advertising environment for the new technology has perhaps crowded out the choices that were and are still available for those same investors, which may in fact be the more appropriate.

For example, the rise of microinvesting platforms that enable people to invest as little as a few dollars per month might give the impression that 1) those platforms are the only ones available for beginning investors or 2) it is sufficient to invest only a few dollars per month. Believing either of those premises is detrimental to the investor.

Another example is roboadvising services. Roboadvisors are a lower-cost, lower-touch substitute for full-service human financial advisors. While they might represent a less expensive but sufficient alternative for a person who would otherwise use a financial advisor, they are a more expensive (i.e., possibly wasteful) alternative for someone who could manage his own investments just fine (the DIY approach) if he knew it was an option. (It’s an option! An easy one! Your brokerage firm will almost certainly make an asset allocation recommendation to you for free if that’s all you’re looking for.)

Pay Too Much or Too Little Attention

On the spectrum of how much attention you should pay to your investments, there is a wide range of what is appropriate. Only the extremes will get you into trouble.

You don’t need to pay a whole lot of attention to your long-term investments. If it stresses you out to see your balance fluctuate daily due to a choppy stock market – and especially if paying that close attention will cause you to try to time the market – force yourself to tune out. You don’t need to check your account balances or investment news daily.

On the other hand, you shouldn’t go years between check-ins, either. You do need to make sure that your investments are doing basically what you expected they would and that they are still appropriate for your goals. A quarterly check-in is sufficient for long-term investments.

Time the Market

One of the gravest investing mistakes that I’ve already hinted at is market timing, which is when you attempt to jump in or out of a market at just the right time to make a killing or avoid a staggering loss.

Guess what? It’s a super ineffective strategy, way worse than just staying invested or steadily adding to your investments. This again relates to the EMH. Any insight you might think you have about an impending skyrocketing or plummeting of the market has already occurred to a zillion other people and been priced in.

You might think you’re buying low and selling high or being fearful when others are greedy and greedy when others are fearful, but most of the time you’re probably just doing yourself a disservice. Besides, even if you guess right once and get out at the right time or in at the right time, you have to be right again to get back in/out!

Be Undiversified

One of the core tenants of modern portfolio theory is diversification. This means that instead of owning one investment of a type, e.g., one stock, you should own a collection of that type of investment. It’s the basic principle of not putting all your eggs in one basket. You never know which stock is going to be a huge winner and which will go to zero. Instead of picking only one or a handful, own a few tens or a few hundreds and spread out the risk.

One of the sneaky ways to become undiversified is through employer stock that you are given or able to purchase at a discount. If you have a high percentage of your portfolio (e.g., > 10%) tied up in employer stock, then not only is your job at risk if the company falters but much of your savings as well!

Pay Too Much in Fees

Fees, just like taxes, are a drag on your rate of return on investment. Instead of getting a 8% average annual rate of return, for example, fees or taxes might knock you down to 7.5, 7, or even 6%! That makes an enormous difference over the decades – to the tune of hundreds of thousands of dollars!

If we use tax-advantaged retirement accounts to avoid taxes on our retirement savings, doesn’t it also make sense that we should minimize our fees?

Sure, it would be worthwhile to pay higher fees if you actually got better investment returns, but, after accounting for fees, approximately 80% of actively managed funds underperform similar passively managed funds.

The way that you can keep an eye on fees is through a fund’s expense ratio. That’s a single number that expresses the all-in costs of owning the fund in terms of a percentage. A very high-fee fund will have an expense ratio of 1% or even higher, whereas a low-fee fund would have an expense ratio of a couple tenths of a percent or even below 0.1%.

Mix Investing with Insurance

A very expensive investing mistake is to mix investing with insurance though a whole life or universal life insurance policy. The selling point is that you build up money in an investment product as you pay your insurance premiums.

However, what you might not realize as you are being pitched such a product is that your premiums are several times or even an order of magnitude higher than they would be for the same amount of term life insurance, and the investment product doesn’t give you great returns, either.

It’s much less expensive to buy term life insurance (the same sort you have on your car – expiring after a set length of time) and invest the rest of the money you would have spent on the premium on your own. It’s very likely that you’ll end up with more money after decades of using that method.

After all, you don’t actually need life insurance for your whole life – just until you reach financial independence. And that day will come a lot faster if you don’t mix insurance with investing.

Basically, the only people who recommend mixing investing with insurance are those who sell that kind of product. Speaking of which…

Blindly Take the Recommendation of Someone Earning a Commission

I’ve met a few graduate students with no need for life insurance at all who own whole/universal life insurance policies. And it was easy for me to correctly guess why: a family or friend had started selling those products.

There are three types of financial advisers, differentiated by how they are paid.

With two of them, it’s transparent how they are paid. One type charges you straight up for their time and will help you create a financial plan. The other type charges you a percentage of your portfolio to manage your money for you. These two types are usually held to a fiduciary standard, which means they are ethically bound to give you the best financial advice for your situation.

The kind that will meet with you for free is likely to make their money through commissions on the products they sell you. They are not fiduciaries. That’s not to say that they will behave unethically, just that they are not required to be objective in their recommendations. They are permitted to pitch you the product that earns them the highest commission as long as it’s “suitable.” And that’s how a grad student with no need for life insurance ends up with a whole/universal life policy.

The caution against blindly taking the advice of someone earning a commission applies to more than just financial advisors. Affiliate advertising is incredibly widespread right now. You may learn about a product from a content creator (e.g., website, podcast) whom you respect. It’s quite likely that the person will earn money if you buy it through their link/promo code. (I used to be an affiliate myself for a few products through a prior website.) Again, earning a commission doesn’t necessarily mean the person is pushing a bad product or is behaving unethically, but you just have to recognize that it is a form of advertising and you should be a savvy consumer. It’s very difficult to claim to be completely objective when there is a commission in the line.