Many people tend to make similar investing mistakes. Although we learn best from our very own mistakes, we can learn from other people’s errors. Read on to learn what mistakes others have made on the investing front.
Failure to build enough savings before investing
Don’t put money into real estate, the stock market or other investments unless you can afford to lose that money. In other words, get your debt under control, build up an emergency fund and make sure you can keep on trucking if you enter dark territory.
Waiting too long to become investors
Once you do have money that isn’t absolutely required for making it through dark territory, don’t put off using that money to build more money. The beauty of compound interest is only beautiful if you start early and keep adding to your investments.
Investing without researching the investment and how it fits your goals
Don’t bet on every hot tip at the beauty shop when you buy a stock, or a bond, or a foreclosure etc.
Research the fundamentals (company strength, earnings, growth potential, industry problems, management, and etc). Understand where the investment fits into your investment goals. Will it be there long term? What piece of your allocation pie does it fill?
Don’t invest in a stock based on recent trends or media noise. Just because Google (example only) has been in the stratosphere for months doesn’t mean it will stay there or keep going higher.
Paying improper attention to fees and commissions.
Brokers can charge a lot for buying or selling a stock. You don’t need high priced brokers any more. Don’t overpay for your trades – go online or use a discount broker.
Pay attention to mutual fund fees (front and back end loads, management fees and etc) – get the lowest you can while still getting the investment performance you want. That means that, sometimes, you may opt for a fund with a higher fee!
Using inappropriate diversification and allocation
The goal of a diversified portfolio of investments is to own pieces that will go up when other pieces go down. If you buy international mutual funds, but they all invest in the same region – you are not diversified. If you buy bonds – but they are all AAA long term domestic bonds – you are not diversified. If you invest everything in the stock market (even if it is invested in cash, bonds or stocks) you are not entirely diversified (what about real estate and real property of other kinds?)
At different stages in your life you will want to take on different levels of risk and keep different percents of your portfolio available as ready liquid assets, mid-term or long-term use assets. Don’t just rely on the typical age related suggestions (such as take your age and subtract it from a hundred and put the resulting percent of your portfolio in stocks and the rest in bonds or liquid assets).Use your real situation to make that decision.
Studies have shown that not keeping your asset allocation in balance is a big factor in losing money – more so than picking the right stocks within an asset class.
Related to this mistake is failure to dollar cost average. If your investment plan is to buy $x.xx of a security each month, keep investing it even when the market is down – ESPECIALLY when the market is down – that is when you get the cheaper shares.
Failure to harvest losses or take gains
Many investors buy a security or property and never think about it again. Sell your investment dogs and use the capital loss in a year you have high income (to lower your income taxes). Go in with a plan for each investment. Know at what price or under what circumstance you want to sell it. Take your gains according to your plan – nothing rises forever. You may lose out on a little bit of money, but you may well latch onto a bunch right before the stock dives (remember 2008?).
Buying stocks before the ex-dividend date
If you are going to invest in stocks, be familiar with industry terms. What is the ex-dividend date? What is the record date? What is the payable date?
Record date – the date used by the company declaring the divided to determine which owners are eligible to receive the divided.
Ex-dividend date – the date (usually two business days before the record date) used by the industry to determine who really gets the dividend. The SEC describes it this way:
“If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller gets the dividend. If you purchase before the ex-dividend date, you get the dividend”
Payable date – the date the dividend is actually given to the stock owner
If a large dividend is declared, the stock price may increase by the amount of the dividend as the ex-dividend date approaches and then back down by the same amount after the dividend is paid. If you buy a stock as the ex-dividend date approaches you may essentially be buying the dividend through the higher priced stock. Marketwatch says it probably makes more sense to wait until the stock price falls after the dividend is paid to buy into that company – at a lower stock price.
Ignoring taxes on capital gains or losses
Taxes can take a big bite out of your investment returns – and may start taking an even large bite in the future. Capital gains taxes have been at record lows for a number of years in the US, but will probably increase in coming years with tax law changes punishing the ‘rich’. According to Forbes advice, the highest historical capital gains tax rate on individuals was 39.9% in 1976 and 1977. Even the low 15% rate we have had the past decade takes a big bite out of your gains, what if that goes to half or more? With the new requirement for investment record keeping firms to track and report your cost basis, you will be paying those taxes.
Handling retirement funds incorrectly
One of the biggest mistakes folks make is not starting their retirement saving efforts soon enough. The sooner you start saving consistently for retirement, the less you have to put in each month to meet your savings goal.
One of the big mistakes used to be not signing up for a company sponsored 401K. Now with the automatic sign up law taking effect, you will have to take steps to opt out – don’t.
Other common issues are not putting enough money in your 401k to get the full employer match (free money); pulling money out of your 401k for other purposes (and having to pay a penalty and a tax on it); and forgetting about a 401k when you change jobs (and losing track of the fact that you have that money), including not rolling it over to an IRA or your new companies plan.
When you finally do retire, another common mistake is taking the lump sum distribution without having a plan to re-invest it so it lasts a lifetime. Many people take the lump sum, put it in their bank account and fritter it away without really knowing where it goes.
What other common investing mistakes have you seen people make? How are you avoiding these mistakes?