5 Investing Mistakes to Avoid In Your 20s

Investing Mistake #1 – Ignoring Investing Altogether

Do you have a 401(k) at work? Are you a participant? Get off to a good beginning by signing up for an employer-matched 401(k)* at work. Otherwise, you are turning down, if not throwing away, free money.

*A 401(k) represents an employer-sponsored account, designed for retirement. It permits you to allocate a certain percent of your pre-tax earnings to retirement. These funds may be invested in various vehicles, including mutual funds, cash, stocks, and bonds. The reference to 401(k) comes from subsection 401(k) of the tax code that establishes the retirement plan.

If you don’t sign up for a 401(k) in your early years, you are alienating yourself from investing and the benefits it provides. A 401(k), when you’re young, is the ideal way to start investing seriously, at least for retirement. This is the best time to begin, as your money has the most time to grow. You also receive 3 important benefits:

  1. The employer matches your contribution (free money).
  2. You receive a tax break – you don’t pay taxes on the amount invested upfront (it is tax-deferred).
  3. The money shelters you from creditors.

No 401(k)? Invest in an IRA that Features a Portfolio of Stocks

If you don’t have access to an 401(k), you should still review the benefits of investing in a traditional IRA or Roth IRA, each of which has its distinct benefits. While Roth IRAs take out taxes for payments, traditional IRA payments are tax-deferred. 

If you invest in a retirement plan when you are young, you can learn how to add to your wealth through stock investing. Don’t allow the concept of investing overwhelm you. Start by investing in a retirement account and go from there.

Investing Mistake #2 – Not Buying Low & Selling High

When you first start investing in stocks, you may get over-analytical. That is not necessary. You don’t need to check your progress daily, especially if you take a long-term approach. If you invest for long-term gains, market fluctuations are just a bunch of noise. Stick it out for the long term.

You can take this approach and make it realizable by remembering the following:

Buy Low and Sell High. Over the long term, stocks can be big winners. However, you also have to keep in mind that nothing is guaranteed or there is no such thing as a “sure” bet. If you set your sights toward longer-term initiatives, placing some money on out-of-favor companies still can lead to investing greatness and success

One Case In Point

A good example of a Contrarian Stock Pick for a Millennial investor is Southwest Airlines (LUV). At the first of 2021, Kiplinger noted that Southwest Airlines sold at a paltry $47 per share, a result of post-pandemic recovery. At that price, Southwest stock trades were discounted 20% to the airline’s 52-week high.

However, earnings are anticipated to move into a positive territory, even if they are only reap 19 cents per share. While a rebound in travel will take some time, Southwest’s balance sheet is strong as well as its management team.

If analysts are right, Southwest is projected to slowly but surely make a comeback in both top line sales and bottom line earnings.

Becoming involved in this type of investing when you are young and keeping up to date on stock movements will help you see there’s more to investing than just buys and sells and economic data points. That may be alright for auto trading platforms, but not if you want to gain the full advantages of investing as a Millennial.

Investing Mistake #3 – Ignoring Dividends

While a dividend paying stock is not immune to a market decline, it certainly  offers some insulation when it comes to investing. Let’s look at one of the best payers, Texas Instruments.

The computer giant has had 17 years of growing dividends, beginning with its first declaration in 1962. Its dividend yield annual is $4.08 or a 2.3% yearly yield. For five years TXN provided a 207% compound stock market return (and that does not include reinvested stocks).

That compares to 101% for the S&P 500. Texas Instruments has had a dividend growth rate of 23% over 5 years. The stability factor for the company for the past 5 years  is 3 on a scale that measures zero as the most stable and 99 the most volatile from IBD.

The dividend payout ratio for TXN is 64% and its earning per share (EPS) 4% annually.

Investing Mistake #4 – Not Maintaining Consistency

Whether you begin with a 401(k) or IRA at the beginning or enroll in a dividend reinvestment plan (DRIP), you need to maintain consistency.

Stay focused on investing like you do with any habit, such as exercise, that leads to a better life.

Millennials have it in their power to truly build wealth. However, they need to stay committed to the process.

Investment Mistake #5 – Not Personalizing Your Investment Plan

One of the major investment mistakes is to follow the herd, or go by what a friend says about investing. You need to map out a plan to make the best investment decisions for yourself. What works for someone else, although well-intended, may not work for you.

If you create your own investment plan, you will also know what to do when earnings climb. While both your spending and saving will undoubtedly increase, you still need to exercise caution, as an excess in earnings can increase what you pay in taxes.

For example, selling a stock you’ve had for less than a year can trigger a short-term capital’s gain, something that is taxed by the IRS as ordinary income. That kind of development can cost you as much as 29% to 39.6%. So, know what you need and for what you are paying.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.