Investments are an important component of a well-rounded financial plan. As a financial planner, I have seen a variety of investment mistakes that could have been prevented. These mistakes are often based on emotions or lack of information. Some investment mistakes can have serious long-term effects. Below are a few common investing mistakes to avoid.
MAKING EMOTIONAL DECISIONS
Many people struggle to separate their emotions from investing, whether it is fear, greed or another emotion. Emotional investing can lead to quick decisions that can negatively affect your short and long-term investment performance. Education is the best defense against emotional investing. The more knowledgeable you are about investing and the markets, the more you can avoid making emotional mistakes.
BEING TOO RISKY/CHASING RETURNS
Everyone has a different level of risk tolerance. Some tolerance can be beneficial, but too much may work against you. Chasing returns by purchasing what is doing well today is not a sound investment strategy. The top performing securities and asset classes of today are usually not the same the following year. Past performance is no guarantee of future performance. Your goal should be long-term appreciation from a well-diversified portfolio, not a get rich quick scheme.
ATTEMPTING MARKET TIMING/TRADING TOO MUCH
Timing the market is difficult. Bouncing from one strategy to the next based on short-term performance can devastate long-term results. Maintaining a long-term disciplined investment strategy, even when short-term results create incredible pressure to abandon the strategy, is one of the most important factors to achieve financial objectives.
BEING TOO CONSERVATIVE/IGNORING INFLATION
Being too conservative may not seem like a bad thing, but your savings may not keep up with inflation. This means your savings may lose value with time, since a dollar today may be worth less than a dollar in 10, 20 or 30+ years due to inflation. Focus on your real rate of return, which is your investment return after taxes, fees and inflation. Your real rate of return is an important component of a sound long-term financial plan.
NOT UNDERSTANDING YOUR INVESTMENTS
It is never wise to invest your hard earned money in something you don’t understand. If an investment or strategy seems overly complicated, either learn about it or find a simpler approach. You should never feel pressure to purchase anything. Take your time and do your due diligence and/or consult with a family member, friend or a professional.
NOT DIVERSIFIED/TOO CONCENTRATED
A well balanced, diversified portfolio should be allocated among various global asset classes to help reduce risks and ensure consistent returns. Diversification among asset classes can be more influential for long-term portfolio performance than the selection of individual securities. Too much concentration in a security or asset class can hurt long-term performance if that security or asset class is more volatile and performs worse than the general market.
IGNORING INVESTMENT FEES
Learn about investment fees, trading costs and financial advisement fees. Investment fees can dampen your overall long-term investment return.
NOT MONITORING YOUR INVESTMENTS
Checking your investment performance excessively is unnecessary; however, monitor your investments periodically so you know when to rebalance your portfolio to maintain the proper allocation and risk level.
NOT GETTING STARTED
Getting started can be a hurdle for some people, especially when there is a lot of market volatility. Avoiding or having no plan may be the easiest option, but it is certainly not a long-term solution.
There is a lot to consider when investing, including establishing clear objectives and determining your risk tolerance, time horizon, liquidity needs and tax considerations. Taking your time to become educated about investing, doing your due diligence and managing your emotions are important for long-term investing success. If you don’t want to manage your own investments, a financial advisor can review and manage your portfolio.
Stay safe and healthy,
Michael Fuhr, CFP®
Evergreen Wealth Services