Investing in the stock market can be daunting, especially when your financial future is on the line. Even seemingly harmless mistakes could potentially cost you tens or even hundreds of thousands of dollars over time, so it's wise to have a strategy in place.
While nobody has all the answers, avoiding some of the most common stock market pitfalls can help maximize your long-term earnings. If I could have a do-over, here are three of the most important lessons I wish I'd learned much earlier in life.
1. I wish I'd started investing sooner
Throughout most of my 20s, I was not at all concerned about saving for retirement. I also assumed that because I couldn't afford to save much, it was better to put it off until I had more to invest. But if I had begun investing even a few years earlier than I did, I would need to save far less per month now to reach my goals.
Image source: Getty Images.
Compound earnings can help your money grow exponentially faster the longer it sits in your account. By getting started investing sooner rather than later, you could substantially boost your savings.
For example, say you're investing $300 per month while earning a modest 8% average annual rate of return. After 30 years, you'd have roughly $408,000 saved. But if you were to invest for just five more years, you'd have a whopping $620,000 in total, all other factors remaining the same.
Regardless of how many years you have to let your money grow, it's wise to invest now. The longer you wait, the harder it will be to catch up later.
2. I wish I'd taken full advantage of matching contributions
When I eventually did begin saving for retirement, I was contributing to a 401(k) that offered an employer match. However, I wasn't investing enough to earn the full match, which ultimately resulted in leaving thousands of dollars of free money on the table.
According to Vanguard's 2023 How America Saves report, the most popular match type among Vanguard 401(k) plans that offer these contributions is 50% of a worker's savings up to 6% of their wages. If you're earning, say, $60,000 per year, this means your employer would provide up to $1,800 per year in matching contributions.
If you're not earning the full match, that could seriously cost you. For example, say that in one scenario, you're contributing $1,800 per year to your 401(k) and earning an additional $1,800 annually from the company match. In another scenario, say you're only saving $1,500 per year while earning $1,500 in matching contributions.
Assuming you're earning an 8% average annual return in both scenarios, here's approximately how your total savings would add up over time:
| Number of Years | Total Savings: Contributing $1,800 Per Year + Company Match | Total Savings: Contributing $1,500 Per Year + Company Match |
|---|---|---|
| 25 | $263,000 | $219,000 |
| 30 | $408,000 | $340,000 |
| 35 | $620,000 | $517,000 |
| 40 | $933,000 | $777,000 |
Data source: Author's calculations via investor.gov.
In other words, contributing just $300 more per year (and earning an extra $300 per year from your employer) could ultimately add up to more than $150,000 in total savings over a career.
3. I wish I'd ignored market volatility
One of the hardest financial lessons I've learned is that pulling my money out of the market during periods of volatility is often a bad move.
Early on in my investing journey, I panicked at the first sign of turbulence and withdrew my funds immediately -- only to instantly regret it when prices bounced back quickly and I missed out on those gains. Even worse, I then ended up paying a premium to get back in the market, as my investments were priced higher when I was ready to buy again.
While it's not easy, it's often wise to ignore the market's short-term fluctuations. As long as you're investing in quality stocks from healthy companies, your portfolio is likely to rebound from downturns. By staying the course and keeping your money in the market, you'll reap the rewards when stock prices inevitably recover.
Nobody is perfect, and you're bound to make mistakes in the stock market at some point. We all do. But if you're able to avoid some of the more common errors, you can save thousands of dollars and set yourself up for a more secure financial future.
