Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “Starting out your investing career the wrong way could force you into years of catching up.”

Many people come up with unrealistic answers to the question of how much risk is right for them. When they’re young and they’ve just begun investing in the stock market, many decide to abandon a prudent, conservative approach. They decide to speculate—but only for a limited time. They expect to turn a small portfolio into a big one in a hurry. Then they can move their money into boring but more dependable investments.

Before you start along that path, here are some key points to keep in mind:

• Heavy losses can be especially damaging for young investors: When you’re just starting out in any field, it’s easy to fall victim to ruses and snares that someone with more experience would spot right away. Later on, when you’ve learned more about successful investing, you’ll be a better buyer. You’ll know better than to bid on an ugly painting just because it’s the work of a noted artist, for instance, or to invest in a building that faces expensive repairs due to delayed maintenance, or buy a promotional stock due to rumours or touting.
  
  Note that when a young person loses money, the loss is doubly costly. You have the obvious, immediate loss. You also miss out on decades of profitable compounding you can achieve with a better-quality investment.

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• Holding fixed-return investments can also be risky: Later in life, some investors make the opposite mistake. As they settle into retirement, they decide that they are too old to assume any investment risk. As a result they believe it’s best to put most, if not all, of their money in more conservative investments, specifically fixed-return investments and government bonds. They work out a budget that shows they can live with today’s low bond yields.
  
  It’s true that government bonds don’t expose you to any default risk. But it’s equally true that they expose you to great inflation risk. Inflation could easily rise above the interest rate on today’s bonds. That means bondholders are continually losing money, even before they pay taxes.
  
  A two-point cut in your rate of investment return, and a loss of the tax deferral available in stocks, can take an enormous bite out of your capital over a decade or two.
• Growing more optimistic as share prices rise is especially dangerous: Between youth and old age, many investors repeatedly make the mistake of growing more optimistic (or bullish) as share prices rise. This is the reverse of a sound investing strategy. As you chase rising prices, you can wind up owning the riskiest portfolio of your life just when it can do maximum harm to your finances.

Our investment advice: Well-established companies are the key to profitable and lower-risk investing. Instead of moving between extremes of risk, investors will profit most — and with the least risk — by building and maintaining a diversified portfolio of well-established companies with strong business prospects and strong positions in healthy industries.

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If you were asked to warn other investors about one investment mistake you have made, what would it be? Let us know what you think in the comments section below. Click here.