7 Mistakes to Avoid When You First Start Investing

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Starting your investing journey can feel like stepping out on a tightrope. It's exciting and empowering. It's also a bit terrifying.

You might have read a few books on how to do it, even watched some talking heads discuss what to buy. But when it comes time to take that first pivotal step, things can get shaky.

It's worth pausing before you jump on to your friend's "hot stock tip" to make sure you aren't thrown off balance by new investors' most common mistakes.

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Successful investing isn't just about knowing what to do; it's also about knowing what not to do. The reality is that mistakes can be far more costly than missing out on the next Nvidia (NVDA) stock.

We'll cover seven of the most frequent missteps we've all made and how to avoid them to help new investors lay the foundation for a successful and low-stress investing journey.

1. Not being aware of the wash sale rule

The wash sale rule is one of those investing mistakes lots of folks learn about the hard way. It's an IRS rule that says you can't deduct the loss from selling a depreciated stock or security if you buy a substantially identical stock or security within 30 days before or after the sale.

The rule exists "to prevent investors from claiming tax deductions on losses for investments they essentially still hold," says Chris Russell, senior wealth adviser with Linscomb Wealth. "You won't face fines if a wash sale occurs, but you cannot deduct the loss on your taxes for that year."

The good news is that the wash sale rule is easy to avoid: Simply ensure there's at least a 31-day buffer between when you buy and when you sell the stock, if you want to claim the loss.

2. Letting FOMO get the better of you

Investing with a fear of missing out (FOMO) is a recipe for disaster. It's a powerful feeling that often arises when a friend brags about their big win on a hot stock, or a colleague shows off a huge profit from a crypto investment.

The temptation to jump on the bandwagon is strong. If they can do it, why can't you?

The answer is simple: Chasing someone else's success is a risky strategy that can lead to buying at the worst possible time. Often, that hot stock has already had a major run-up, and by the time you hear about it, it's just as likely to be heading for a cliff as continuing its ascent.

Even if your friend's investment doesn't tank, her choices might not be the right ones for you.

Successful investing is about having a plan tailored to your unique goals and circumstances, not someone else's. Don't let FOMO trick you into making rash decisions.

3. Going all in on penny stocks

"Buyer beware," warns Russell. If you want a great way to increase the chances of losing your money, bet it all on penny stocks.

These stocks trade at low price points – typically, for less than $5 per share – in over-the-counter (OTC) markets. They can look like cheap deals and be enticing for investors with small balances, but they're highly risky investments.

"Many of these companies go out of business, and your investment could easily become worthless," Russell says. "There can be major swings in the value of penny stocks, and you might not see it coming, because there is often very little reliable information on these companies."

OTC markets aren't regulated the same way as more established exchanges, such as the New York Stock Exchange (NYSE).

"There is less oversight and regulation for penny stocks, and that makes you more vulnerable," Russell adds. By the time you spot trouble, it might be too late to sell, because everyone else is probably trying to do the same.

"True wealth is built by owning solid companies, not rolling the dice on speculative companies," says David A. Schneider, a certified financial planner with Schneider Wealth Strategies.

4. Going big with money you can't afford to lose

Read enough investing advice ,and you're bound to see this statement repeated time and again: "Only invest money you can afford to lose." It's often tacked on at the end where it's easy to overlook as fine print, like the legal mumbo jumbo you scroll past before accepting the terms and conditions.

This is one piece of fine print that should be in 50-point, all-caps and bold font because it's that important to your financial future.

The only trait all investments have in common is that they carry risk. Some, such as bonds, might be lower risk, while others, including penny stocks as well as cryptocurrency and bitcoin, are much higher risk.

But no matter the level of risk, there's always the chance that you'll lose some or all your money. This is part of the reason experts say to keep your emergency fund in cash.

That's not to say you should keep all your savings in cash if you're risk-averse. Investing is crucial for long-term growth. Just make sure you understand exactly how much risk you're taking, and go in knowing what's at stake.

Before investing, ask yourself: Can I afford to lose this money?

5. Not doing your research

The amount of research you do before investing can be the difference between a calculated risk and a blind gamble.

Without research, you're not an investor; you're a speculator.

Your investments might rise in value, but if you don't know why they're rising, you won't know when to sell, or how to pick other winners.

A lack of research can leave you at the whims of "gut instincts" and emotional reactions, neither of which is a recipe for long-term success.

You don't have to be able to name every member of the executive suite and what they have for lunch each day, but you should understand the financial position and prospects of a company before you invest.

Ensure you understand the investment philosophy and strategy of mutual funds and exchange-traded funds (ETFs) you're considering.

Always buy with your exit strategy in mind.

6. Not knowing when to call it quits

It might feel as if deciding when to click "buy" is the hardest decision an investor makes, but knowing when to sell can be equally, if not more, challenging.

It's easy to get emotionally attached to an investment or to resist selling if it has lost value, but sometimes the best approach is to cut your losses and move on.

"If there are significant shifts in a sector, like regulatory or tariff risks, it can be a signal to sell," Russell says.

It might also be time to sell if your investment has performed well. High returns could indicate that you've become overconcentrated in the appreciated holding, which increases your portfolio risk. It's likely time to rebalance by selling some of your appreciated positions to buy more of the underperformers.

Sometimes, the time to sell is when your situation has changed. For instance, as you near retirement, it's a good idea to shift out of more volatile investments in favor of firmer ground. Just make sure you're not selling out of fear about short-term market volatility.

7. Checking your portfolio too often

With 24/7 access to your brokerage account, it can be tempting to check your balance at all hours of the day. But this is likely to lead only to headaches and poor decisions. Checking too often can tempt you to trade based on news headlines and short-lived market fluctuations.

"Successful investing is a marathon, not a sprint," Schneider says. "Checking your portfolio constantly is like looking at a plant every five minutes to see if it has grown. It just creates anxiety and distracts you from your long-term plan."

If your portfolio is well-diversified and designed around your long-term goals, you only need to check on it a couple of times a year.

Giving your portfolio breathing room is often the best approach for both your sanity and your financial future.

Coryanne Hicks is an investing and personal finance journalist specializing in women and millennial investors. Previously, she was a fully licensed financial professional at Fidelity Investments where she helped clients make more informed financial decisions every day. She has ghostwritten financial guidebooks for industry professionals and even a personal memoir. She is passionate about improving financial literacy and believes a little education can go a long way. You can connect with her on Twitter, Instagram or her website, CoryanneHicks.com.