Any successful business owner will tell you that, in order to succeed, you need to be able to learn from your mistakes. When it comes to investing there are plenty of mistakes that can be made but, in our opinion, it would be better to learn about those mistakes first and thus avoid them. (We hope you agree with our logic.)
With that in mind we put together a blog that will explain a little bit about some of the most common mistakes that people make when investing. Knowing these mistakes will hopefully improve the chance that you’ll reach your investing goals whether, especially if you’re still a novice. Enjoy.
Than the old saying ‘better late than never’ really isn’t useful here. The fact is, the longer that you hold onto an investment the better the results and the more money that you going to make. Experts will tell you that it’s not about the timing of the market, it’s about how much time you have been in the market. Simply put, the longer that you have your money invested the bigger your opportunity will be for compound growth to help you. Also, the longer you own a stock the better as usually they will be many more ups and downs over the long term.
Experts predict that a new retiree today will need to have at least saved 20% of their annual income in order to be able to retire comfortably at a moderate income level. For most people, that means they’re just not saving enough. In this day and age of instant gratification that could be a bad sign for your retirement nest egg.
Being overly aggressive is a mistake that many stock investors make. Just as the stock market is hot right now it was hot in 1999 and 2007. Of course, the people who were overly aggressive in those years were more than likely devastated in 2000 and 2008. The best way to protect yourself from the market itself is to have a balanced portfolio that includes high risk, medium risk and low risk stock investments.
When it comes to the stock market there is no better old adage then this one; past performance is no guarantee of future results. If you invest in stocks solely based on their recent returns you may find that your hot stock suddenly freezes. As we mentioned above, having a balanced portfolio with a variety of asset classes will protect you when one goes down.
As we stated earlier, the time that you’re in the market is most important. That being said, trying to ‘time’ the market and jumping in and out of investments when you think that it is ‘right’ usually leads to problems, not gains. The simple cost of frequent trades can also reduce your returns significantly, especially in the accounts that you have that are taxable. If you’ve invested in reasonably priced stocks and have a diversified portfolio your best bet is to hang on to them long-term.
Many people make the simple mistake of overpaying for fees, including ‘load’ fees and ‘wrap fees’ of up to 2%, fees that can have a serious negative affect on growth. Better to manage your own portfolio, choose no-load, passively managed index funds and minimize your costs while maximizing your savings.
One of the biggest mistakes that investors make is underestimating the effect that inflation and taxes will have on their portfolio. The fact is, even though $1 million may seem like a lot of money today, in 30 years it will be much less due to inflation. When you combine that fact with income taxes, capital gains taxes and other taxes, you can see the reason why it’s vital to invest as much for retirement as you possibly can.
Finally there’s the mistake of not rebalancing your portfolio. A balanced portfolio will have stocks and bonds in equal measure more or less. And will also have different asset classes which normally grow at different rates. Depending on the market, and your risk tolerance, changes in the stock market may throw your portfolio out of balance. That’s why it’s a great idea to rebalance your portfolio at least once a year, selling any positions that have become too large and reinvesting in others that reduce risk and take advantage of other opportunities in your portfolio.
One way to do this and ensure automatic balancing of your portfolio is to invest in ‘lifecycle funds’, a type of target date investment that rebalance is automatically based on a specific time horizon. (Typically they are a little more expensive, just FYI.) Also keep in mind that even though a funds target date might be in line with your savings goal, it may not align with your tolerance for risk.
To sum it all up, save as much as you possibly can, steer clear of high fees and taxes, create a balanced and diversified portfolio that you rebalance periodically and keep your investments as long as you can. If you do these things the likelihood of being successful will increase dramatically. Best of luck