For those of us who want to take care of our financial futures but aren’t investing pros, there are plenty of pitfalls. To help steer you on the right path, I’ve put together some of the top investing mistakes that we see on a regular basis… and how to avoid them:
PAY TOO MUCH ATTENTION TO THE STOCK MARKET
Studies have shown that reacting to constant market swings tends to hurt investors rather than provide them with sustainable earnings.
A study, out of the University of Massachusetts, found that individual investors tend to sell winning investments while hanging onto losing investments.
You might think you’re being smart by tweaking your investments whenever the market surges or dips, but history shows that most individual investors buy high and sell low, despite their best intentions.
The next time the market does something crazy, try to steel yourself against the urge to make any knee-jerk trades, and keep your focus on your long-term goal.
PAY TOO LITTLE ATTENTION TO YOUR PORTFOLIO
On the opposite end of the spectrum, caring too little about the market’s impact on your portfolio can also be detrimental.
As certain kinds of assets (like stocks or bonds) perform better or worse than others, your target allocation (the percentage mix of various investments that you’ve chosen) will be affected. As a consequence, over time, you can drift very far from that your target allocation. Ignoring your portfolio for too long can skew your risk and hurt your returns over time.
Aim to rebalance your portfolio at least every year to ensure your portfolio actually reflects your investing goals.
BLINDLY BELIEVE THE EXPERTS
Many people take the word of the various financial experts as gospel, but these so called experts (usually, the ones you see on television), aren’t going to suffer personally if you take their advice and your portfolio takes a hit.
Although some stock tips might turn out well, others won’t. TV personalities make a living by talking up market fears and elation, and sounding like they know everything. But one study found that the average accuracy of all pundit recommendations was 47.4%, which is a little worse than a coin toss.
Remember, when everyone pours into a certain “hot” investment, the price of that investment increases and it becomes less of a steal. By the time these tips are broadcast to millions on television, they’re hardly the overlooked, well-kept secrets you’re hoping for.
THINK YOU CAN BEAT THE MARKET
Statistically, the average individual investor will not beat the market.
Most investors wish to buy stocks. Whether they understand it or not, they expect to make a killing. But doing so is far from easy, without expertise, time, and resources.
Many of us fall prey to problems such as deciding a stock is well-priced by comparing its current price to the 52-week high without taking the time to see why it has fallen, leading us to buy inferior investments.
In addition to the chance that we’ll choose poorly and underperform the broader market, stock picking comes with way more risk than investing in mutual funds, because it concentrates your money in just a couple investments.
By contrast, if you invest in a well-diversified mutual fund, you’re getting a little bit of lots of different investments, which means that, if one of them fails, you have enough other stuff to cushion the blow.
BOTTOM LINE
The world of investing can be intimidating. Especially for those with a long time horizon (read: a long time before you need your money back, like if you’re a young person saving for retirement), the most powerful key is simply to start investing.
Time is your greatest ally, which brings us to the very worst investing mistake you can make: Not investing at all.