Anyone who has ever made money by investing has probably also made their share of blunders. In fact, it's the blunders along the way that have probably led to some great lessons learned.
If you've made mistakes with your investments, you are not alone. Here are some of the most common investing mistakes we all make from time to time.
We start buying stocks and mutual funds without any real idea of our goals, timeline, or risk tolerance. We trade on a whim, with no sense of how each investment fits with our overall portfolio. Eventually, we'll become more organized and we'll be able to invest with purpose, simplicity, and success.
We've all seen the market go down and have panicked. We unload quality stocks that later rise back up to new heights. We also buy popular stocks at inflated prices, only to see them come back to earth. Over time, we learn that selling high and buying low is a much more profitable approach.
When we start investing, we are cautious and too conservative. Perhaps we're young and not too thrifty and fail to put enough aside. We don't understand the power of compounding returns over time. We'll kick ourselves when we're 55 because we wish we'd have saved more when we were 25.
We're overloaded on tech stocks and hot biopharmaceutical companies. We go after wacky investments like leveraged ETFs and embrace volatility. We might make money quick, but we're just as likely to lose it fast. We will learn the hard way that slow and steady growth is a more reasonable goal.
We're terrified of losing money, so we invest in bonds and cash, even though we're 35 years from retirement. We get giddy over a 2% return from a CD. Over time we will learn that it's impossible to get rich without taking some calculated risks.
We buy a mutual fund or ETF because we think it's in line with our investment goals, but fail to notice that we're losing a full percent or more from expenses. There are management fees, account fees, transaction fees and a variety of other costs that are passed onto us, eating into our investment returns. Eventually, we'll learn to find those solid, well-performing funds and ETFs with super-low expense ratios.
We're ignorant of the advantages of Roth IRAs, which allow us to see investments grow tax free, and 401(k) plans, which let us defer taxes on investments and reduce our taxable income now. We're oblivious to the impact of capital gains taxes, buying and selling frequently in taxable accounts. Eventually, we'll become more tax savvy and our investments will rise in value faster.
We buy and sell shares of stock frequently, unaware that we may be paying big bucks to a stock broker when we could trade online for less than $10 a trade. But even when we do discover a discount broker, we buy and sell so often and just a few shares at a time, so even small commissions make a dent in our portfolio. We will learn over time to buy and sell with more money so that commissions don't have the same impact — or to find investments that trade commission-free.
We are initially mesmerized by the financial pundits on CNBC and other financial news networks. We act on every stock tip from Jim Cramer and every piece of speculation about what the Fed will do. Soon, we'll learn to separate the sound analysis from the noise, and have confidence in our own ability to execute a long-term investment strategy.
We watch the day-to-day performance of the markets, and allow the ups and downs impact our emotions. We see a stock dip 2% in a day and feel like punching a wall. We see it rise 3% and want to throw a party. We will conclude that this is no way to live, and will instead feel content checking in once a week, or so.
We think we have a great investment plan, with a solid mix of stocks in various sectors and asset classes. It's all set up for optimal returns, except that we fail to pay attention as the investment mix goes off kilter. Now we're too heavily invested in one sector and don't have enough exposure in another. This offers the lesson that just because our contributions are invested a certain way, doesn't mean they'll end up that way. Rebalancing our portfolio at least once a year will help us stay on track.
What are you doing to correct your investing mistakes?
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