Starting to Invest Without an Emergency Fund
The most common mistake is starting to invest with almost no savings. When an unexpected expense arises, you are forced to sell your investments, and if the timing is bad, you lock in losses. Build up at least 3-6 months of living expenses in savings before you begin investing.
The next most common mistake is jumping into stocks that are trending on social media or in the news. By the time something is making headlines, the price has usually already risen, creating a high risk of buying at the top. Save individual stock investing for after you have built sufficient knowledge and experience, and start with regular contributions to an index fund.
Getting Swayed by Short-Term Price Movements
When you first start investing, it is hard not to obsess over daily price movements. Many people panic and sell after a decline of just a few percent. However, short-term drops are routine in long-term investing. The S&P 500 experiences a decline of 10% or more roughly once every five years, yet it has trended upward over the long term.
The countermeasure is to keep your investment amount to a level where losing it would not affect your daily life, and to avoid checking your brokerage account too frequently. Once you set up automatic contributions, checking once a month is sufficient.
Choosing High-Cost Products
Differences in expense ratios (management fees) create a significant gap over the long term. Compare contributing 3 man-yen per month for 30 years to an index fund with a 0.1% annual expense ratio versus an active fund with a 1.5% annual expense ratio. At 5% annual return (before fees), the low-cost fund grows to approximately 2,497 man-yen while the high-cost fund reaches only about 1,997 man-yen. The expense ratio difference alone creates a gap of approximately 500 man-yen.
When selecting a mutual fund, always check the expense ratio first. Index funds tracking global equities or the S&P 500 typically have expense ratios of 0.05-0.15% per year. When choosing between funds that track the same index, always pick the one with the lower expense ratio. Introductory books for beginner investors help you identify common pitfall patterns before you encounter them.
Neglecting Diversification
Concentrating investments in specific stocks or asset classes is another common beginner mistake. Even if you are convinced a company will grow, there is always the risk of an unexpected scandal or structural industry change causing a stock price crash. Investing in a single global equity index fund automatically diversifies you across thousands of stocks.
Geographic diversification is also important. Investing only in Japanese stocks means your assets directly suffer from any downturn in the Japanese economy. A global equity index fund automatically diversifies across the US, Europe, emerging markets, and more. Introductory books on diversified investing explain the practical methods behind the principle of not putting all your eggs in one basket.
Next Steps - How to Start Investing While Avoiding Mistakes
The simplest way for beginner investors to avoid mistakes is to follow these four steps: (1) Build up 3-6 months of living expenses in savings, (2) Open a NISA account, (3) Start automatic monthly contributions of 1 man-yen to a global equity index fund, (4) Check your brokerage account only once a month.
Try our simulator to see how even small regular contributions can grow into substantial assets over the long term. Simply understanding the basics of investing will help you avoid the majority of common mistakes.