Avoid these eight money and investing mistakes.
By William J. Lynott
There is no magic bullet of investing. Nope. No surefire technique will make you rich.
But there are many investing mistakes that obstruct the road to financial security—potholes that will hinder your journey.
Here are eight of the most common money and investing mistakes I have seen over the years. (There are some I have committed myself.)
Failing to start early
“Nothing beats the combined power of steady savings and compounding,” says Rick Pierchalski, CEO at BPU Investment Management in Pittsburgh, Pennsylvania. “The younger you begin investing, the more likely you will reach your investment goal, be it saving for a mortgage, college education for children, or retirement.
“For example, a 25-year-old woman who wants to have $1 million at age 65 in her tax-deferred IRA account and thinks her investments will yield 6 percent a year, has to put $6100 into the account per year. If the same woman waits until age 40 to start her IRA, she will have to feed it $17,200 per year to have $1 million at age 65, based on that same average performance of 6 percent.”
While it’s never too late to start taking advantage of the miracle of compounding interest, the earlier you start, the smoother will be your journey down the path to financial security.
Waiting for stocks to hit “bottom” before you buy or hit the “top” before you sell has long since proven to be a losing game for investors.
Making decisions based on emotions
Emotions play a vital part in the lives of most people. Choosing a mate, deciding on a profession or occupation, picking a place to live, picking friends—are a few of the most obvious. Emotions have a rightful place in decisions like these. But allowing emotions to intrude into your financial affairs is usually a serious mistake; for example, buying and holding stock in a company because you happen to like its product.
When it comes to investing, stick with the facts. Go with your head, not your heart.
Failing to set an appropriate asset allocation
If there is one principle virtually all investment professionals agree on, it’s the need to set and maintain an allocation of your assets suitable to your own situation and goals.
Asset allocation refers to the process of dividing your investable assets among stocks, bonds, and cash. While there are a number of other possible investment choices, such as real estate investment trusts, the majority of investors limit their investments to the three mentioned above.
The mix of stocks, bonds, and cash that is right for you at a given point in your life will depend on such things as your age and your tolerance for risk. For more information on asset allocation, log on to http://money.cnn.com/retirement/guide/ investing_basics.moneymag/index7.htm.
Failing to rebalance your portfolio at least once each year
Once you allocate your assets in the manner you feel is right for you, it’s important to rebalance at least once a year. As the price of equities goes up or down, the ratios you have established among stocks, bonds, and cash will change.
If the value of your equities has risen, you may want to sell off some of them to restore your original ratios. If their value has dropped, moving more cash into equities may be appropriate to restore balance.
Failing to rebalance periodically guarantees your original asset allocation will become distorted over time, thus nullifying your original goal.
Trying to time the market
Waiting for stocks to hit “bottom” before you buy or hit the “top” before you sell has long since proven to be a losing game for investors. While you might get lucky once in a while with timing to buy or sell, that luck isn’t likely to last.
You may have heard about “day traders.” Those are the folks who try to make a living by timing the market. Turnover among day traders is extremely high; most quickly wind up going back to their original “day jobs.” Day traders who lose everything are not uncommon.
Instead of trying to time the market, select the stocks or mutual funds you buy only on the basis of sound fundamentals. Placing market-timing buys or sells is speculating, not investing.
Monitoring day-to-day or hour-to-hour stock movements
Modern technology has made it easy for computer users to monitor stock market activity in live time. Obsessing over the hourly ups and downs, especially in the volatile markets we’ve been experiencing lately, is a surefire recipe for the kind of anxiety that leads to poor investing decisions.
Leave that kind of behavior to the day traders. Have a long-term plan and stick to it.
Setting unrealistic or not clearly defined goals
Failing to have an overall plan for your investments is, in itself, a step toward poor results. To be successful, an investing plan must be made on sound principles.
Setting goals that are too vague such as “improving my returns” or unrealistic such as planning on a 15% return are likely to accomplish nothing more than abandoning the plan.
Paying too much attention to financial media
Stay away from those financial news shows and newsletters claiming to let you in on investing secrets that will make you rich. It’s highly unlikely they’ll offer you anything that will advance your investing goals.
If anyone has investment secrets that would make you rich, it’s unlikely they’d be touting them on TV or writing about them in subscription newsletters. They would simply use those secrets to make millions for themselves and wouldn’t have to sell newsletters to make a living.
Always keep in mind there are lots of people out there whose sole objective is separating you from your money.
Of course, there are many other potholes along the road to successful investing. You may have thought about a few yourself. But carefully avoiding these eight mistakes will go a long way toward making your investment journey safe and successful.
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax adviser for advice regarding your particular situation.
Bill Lynott is a management consultant, author, and lecturer who writes on business and financial topics for a number of publications. His book, Money: How to Make the Most of What You’ve Got, is available through any bookstore. You can reach him at firstname.lastname@example.org or through his website: www.blynott.com.