Investing is seen as one of those necessary things for those who want to build up a solid nest egg. For many, making retirement means that it is necessary to invest. Of course, there are many investments to choose from, including stocks, bonds, currencies, commodities and funds. However, for most people it is easiest to follow a simple investing strategy that offers reasonable returns over time, and doesn’t require a great deal of tinkering. But, no matter what kind of investing you do, it is vital to avoid the following 5 mistakes.
1. Follow the Herd
This is one of the worst investing mistakes you can make. Constantly moving your money around because it’s what everyone else is doing not only racks up the transaction fees, but also ensures that you will probably find yourself behind the curve, entering bull markets just before they crash, and missing out on potential earnings by getting in while the market is down.
Instead, consider Warren Buffett’s advice about selling when everyone else is greedy, and buying when everyone else is scared. This way, you unload while there are buyers, and you buy when prices are low, making more money in stocks when the market rebounds. At the very least, remember that slow and steady wins the race, and consider dollar cost averaging, rather than active trading.
2. Panic at the First Sign of Trouble
Many people panicked just after the financial crisis, pulling all of their stocks and turning to cash and bonds. However, making such decisions based on fear and a panicked knee jerk reaction is not the path to investing success. Instead, consider your investments separately. If the fundamentals of your investments haven’t changed, consider sitting tight until this all blows over. And remember, you get more bang for your buck in a down market. If you are really nervous, consider moving some of your assets with capital preservation in mind, but don’t abandon stocks entirely in your panic.
3. Emphasize Past Performance Too Much
Remember that “past performance doesn’t equal future results.” This is especially true of managed mutual funds. You may find yourself paying a higher premium because of a fund’s performance in the past, only to be disappointed with the future. Moderate your expectations, and consider index funds or ETFs instead of actively managed mutual funds. Also, avoid making unrealistic projections for your returns. Err on the conservative side, and avoid the conventional wisdom that stocks will return 9% to 10%. Instead, plan for them only returning around 6%. The 10-5-3 rule is not likely to be in effect for the coming decade of muted growth.
4. Neglect to Re-Allocate Your Portfolio
Every now and again, it is important to consider your portfolio allocation. Look at your holdings and make measured decisions about whether you need to move your money around. Sometimes, it makes sense to take some losses, offsetting some of your capital gains, or getting a tax advantage. In some cases, it makes sense to lock in gains. Remember, too, that there are not tax consequences associated with losses and gains seen in your IRA or 401k. Take the time to review your investments, and adjust your plan as needed — provided you aren’t making decisions based on fear.
5. Overconfidence in Your Abilities
It might be fun to do a little active trading and see if you can find a little success. But don’t let it go to your head. More than likely, your results will be subject to what happens in the market, rather than taking control of your investment destiny with your superior skills of penetration. Overconfidence can lead to too much trading and tinkering and can lead to losses when the market hits you back, or just eat into your returns because of all of the transaction fees.
Set aside a little “play” money for active trading if that’s your thing, but don’t base your long term investment strategy on your ability to beat the market.
Can you think of other investment mistakes to avoid?
Disclaimer: I am not an investment professional. This should not be construed as investment advice. All investment carries the risk of loss. Before investing, do your own research and/or consult with an investment professional.