CHICAGO — Despite all that has been written over the years about avoiding the most common investing mistakes, many of us seem to make the same ones over and over again.
I’ve written about unfortunate investing mistakes before, but I’ve heard from a number of readers reminding me that there are plenty of others that I should have mentioned. Here are seven more:
HANGING ON TOO LONG
What was a good investment when you bought it may not be a good investment today. The financial world is in a constant state of flux so it’s important to establish rules to guide your selling strategy. The psychological urge to hold on to what you already own can be harmful when it comes to your investments.
FAILING TO HAVE AN INVESTMENT PLAN
Designing a sound investment plan and sticking to it through the inevitable ups and downs of market conditions may not be the most exciting approach to money management, but in the long run it’s more likely to be the most profitable.
Your situation is unique, and your investment plan should be designed to suit such things as your personal goals and your own tolerance for risk. For example, your primary goal may be providing you and your family with a financially secure retirement, or you may want to accumulate enough money to put a child through college.
On a personal level, you may be financially conservative with little taste for risk, or you may feel that investments with a little risk attached are the best way to reach your goals. Also, your age is an important factor. Are you in your 30s or in your 50s or 60s?
For more information on investment planning, I’ve found Strategic Wealth Advisors, El Paso, Texas, to be a good source.
PAYING TOO MUCH ATTENTION TO FINANCIAL EXPERTS
Chances are that your mail often includes pitches for investment newsletters that promise to make you rich. Get real. If anyone had a sure way of getting rich in the stock market, would they be likely to offer it to the world for $99 a year? Of course not, they’d make millions and keep it to themselves instead of hawking newsletter subscriptions.
FAILING TO MONITOR INVESTMENT FEES
Almost every investment has a cost. Each time you buy or sell a stock or bond through a broker, you pay a commission. When you buy a mutual fund, a fund management fee must be paid.
Equally important, you should stay away from mutual funds that have a sales charge called a “load.” The load may be imposed as a sales charge when you buy the fund or a redemption charge imposed when you sell the fund. Either way, you will be paying a fee that contributes nothing to the likelihood of achieving your financial goals. Always make certain that the mutual fund you are buying is a “no-load” fund. Past studies have shown that load funds have no performance advantage over no-load funds.
While it’s easy to ignore these often “hidden” costs, every dollar paid out in investment fees is a dollar removed from your investment portfolio forever.
Keeping yourself aware of what you are paying in investment costs and doing what you can to minimize them can make a big difference in your financial well-being. Do this by shopping for mutual funds with lower management fees and using an online discount broker instead of a full-service broker.
These days, even your bank is getting a piece of your pie. Most banks are experimenting with new fees to improve their own performance. That’s why it’s important to review your bank statements carefully each month to make sure you’re not paying a fee that you’re not aware of.
FAILING TO TAKE FULL ADVANTAGE OF TAX DEFERRAL
IRA, 401(k) and other tax-deferred retirement plans offer the opportunity to stash away money shielded from Uncle Sam’s grasp until you reach age 70½. Failing to make the maximum allowable deposit into one of these accounts each year can be a costly mistake.
FAILING TO PROPERLY ALLOCATE ASSETS
Among the asset classes that should be carefully allocated in every investment portfolio are stocks, bonds, cash and cash equivalents. Proper allocation depends on such variables as your age, the size of your portfolio, and your risk tolerance. While most professionals agree that every portfolio should contain a proportion of stocks, that share should decrease in favor of a higher allocation of cash and bonds as the investor ages.
It’s too easy to end up with a portfolio consisting of somewhat random investments unless careful consideration is given to proper allocation.
Most brokers will offer advice on proper asset allocation, and much help is available online (Investopedia is a favorite site of mine) and in investment publications.
FAILING TO REBALANCE PERIODICALLY
Once you have worked out a proper asset allocation, it’s important to remember that many external changes can shift your allocation away from your original. For example, stock prices may rise, increasing your desired proportion of stocks. That’s why it’s mandatory to examine your portfolio on a regular basis to see if rebalancing is necessary. Some advisers suggest that rebalancing should be done at least annually.
There are, of course, many other possible investing mistakes that can alter your financial performance. However, careful avoidance of common mistakes such as these can help to smooth out the road to a financially secure future.
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.
Have a question or comment? E-mail our editor Dave Davis at [email protected].