Avoiding Common Investing Mistakes
1. Not having a defensive approach to investing. During boom times, many personal investors find it difficult, if not impossible, to rein their unbounded enthusiasm, willingness to take undue risk and most of all, greed. The urge to “cash in” is too overwhelming. If unchecked, investing can quickly become a form of addictive gambling. In fact, the psychological aspect of investing should never be overlooked. Maintaining a realistic perspective is just one critical ingredient for long-term wealth building.
2. Underestimating the impact of fees and commissions. Generally, the first item of interest for many personal investors when reviewing their brokerage or mutual fund statement is the amount of money they made this quarter as opposed to the previous quarter. Eager investors may also want to compare the performance of their investment over the past 3 or 5 years in order to gauge the net gain or loss. Rate of return is only one measure. Sadly, investment fees and commissions are usually the last items that garner attention from many individual investors. Ongoing fees and expenses, some of which may increase over time, can slowly eat away the value of an investment and greatly diminish your net worth. Calculating net investment gain or loss must account for the deductions of fees and/or commissions.
3. Underemphasizing the impact of taxes. As with fees and commissions, many personal investors often fail to realize the tax consequence of a given investment and its potential impact on profits. The importance of tax-efficient investing should never be neglected. Different types of investments are also subject to specific tax guidelines and rules.
4. Minimizing the importance of having a balanced portfolio. Too much diversification or too little? Beginning and even fairly seasoned investors can easily overlook the purpose of having a balanced portfolio. True asset allocation consists of holdings in a broad range of investment categories to accommodate different time horizons and changing situations. The habit of duplicating mutual fund investments is a classic mistake of many investors. Holding 5 mutual funds that mirror securities and investment style is not an example of a balanced portfolio. Such a portfolio is more likely to be a laggard and prove costly in the long-run in terms of fees and expenses! The scattering of limited financial resources should be avoided.
5. Lack of clear objectives and preparedness. Before considering any investment, it is essential to have well-defined objectives and a focused strategy. A few questions one should ask include: why does this investment make sense for me at this stage in my life? How does this investment fit in with my short, medium or long-term goals? What is the risk to reward ratio for this type of investment as compared to other types of investments? Prudent investors should never skimp on research and validation of data when analyzing the potential merits and risks of an investment.
6. Too much trust in experts. Are you overly relying on newsletters and “trusted guidance” from “market experts”? Do you have a portfolio that reflects your needs, objectives, time horizon and risk level? Or, is your portfolio a patchwork of inappropriate and odd, "hot" stock picks "recommended by sector experts'? Most likely, these stocks were never "hot" in the first place and now serve as a painful but instructive reminder of how not select a stock.
Clearly, these are just a few of the most common investing mistakes. Other issues include: not keeping up with current business and economic news and trends as they affect your investments, not checking the credentials of an “investment advisor”, putting all your holdings in liquid cash savings, not evaluating your portfolio on a regular basis, ignoring annual reports and other relevant financial updates about your investment holdings, becoming overly attached to a particular investment, pursuing risky “market timing strategies”, buying securities and then basically doing nothing or engaging in excessive portfolio rebalancing.
For informational purposes only and not intended as advice and/or recommendation.
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