In the worst of times, investing can be intimidating, but it doesn’t have to be. In the best of times, investing can be exciting, but it shouldn’t be. It’s when people get too excited, or too scared that they tend to make the biggest mistakes.
This article will help you understand some of the most common investing mistakes that people make, and how to avoid them.
1. Staying on the sidelines.
Don’t wait for the “right” time to start investing—it will never come.
How to avoid this mistake: Start now; you may not have enough money for a secure retirement if you don’t.
2. Chasing yesterday’s winners.
It’s tempting to buy an investment that has made a recent splash by exceeding expectations, but by the time you do its success could already be fading. Rather than blindly chasing yesterday’s winners, focus on future potential. Look at long-term as well as recent performance to gauge an investment’s volatility, and to understand how it fits into your overall portfolio.
How to avoid this mistake: Seek professional advice when you can.
3. Diversifying too little.
Divide your investment dollars among different investments and asset classes. Stocks, bonds, the mutual funds that hold them, and other investments react differently to changing market conditions. When one asset class is down, others may do well, which will out your overall investment risk.
How to avoid this mistake: Diversify your portfolio, by investing in a blend of different asset classes that might be right for your situation.
4. Letting fear and greed rule your choices.
Fear may tempt you to cash out of your investments at the first sign of trouble. Instead, carefully reevaluate an investment before selling it. And don’t buy an investment just because you have a hot tip.
How to avoid this mistake: Keep a balanced outlook in all your investment decisions.
5. Ignoring expenses.
The higher your expenses, the lower your investment’s return, so pay attention. Trust your decisions and stay the course.
How to avoid this mistake: Review your investments at least annually and rebalance your portfolio if necessary. Expense ratios above 1% should be scrutinized to see if there isn’t a lower-cost alternative that could achieve the same objective.
6. Burying your head in the sand.
No investment plan is risk free, but by avoiding major mistakes you can worry less about your portfolio going bump in the night.
How to avoid this mistake: Set aside time to review your investments. If you feel that you can’t do this, find an investment advisor and ask them how they would handle your investments.
Managing your investments can be daunting. But it doesn’t have to be. By developing an investment strategy that is appropriate for your situation, and by avoiding common mistakes, a consistent investment approach can set you up for long-term financial success.
If you feel that you need help taking that first step, talk to a financial planner. At Lawrence Financial Planning, we would be more than happy to schedule a complimentary phone call to see if we’re the right firm to help you with your financial planning needs.
If you're ready to see what working with Lawrence Financial Planning might look like, you can learn more about how we work with clients right here.