Investing is at best a risky proposition and sometimes even the best investment ideas don’t work out. However, avoiding these 9 mistakes may help improve your investing outcomes.
1. Investing without a plan
When you take a road trip in your car you generally use a map to help guide you to your destination. Investing is a means to an end, a road map to achieve your goals such as providing a college education for your children or funding your retirement. Without a financial plan, how will you know how much you need to accumulate to achieve your goals? How much risk should you take? What types of returns do you need? Are you on track or do you need to make adjustments? Investing without a plan is like hopping in the car without any idea where you are headed.
2. Inability to take a loss and move on
It’s difficult for many investors to sell an investment at a loss. Often they prefer to wait until the investment at least gets back to a break-even level. Perhaps it’s part of our competitive nature. Investing is not a competitive sport. When reviewing your investments ask yourself, “Would I buy this holding today?” If the answer is no, it’s time to sell and invest the proceeds elsewhere.
3. Not selling winners
I’ve seen many investors over the years refuse to sell highly appreciated holdings, all or in part. There is always the risk that you’ll sell and the price will keep going up. But sometimes it’s best to protect your gains and sell while you’re ahead or at least consider selling a portion of the holding and reinvesting the proceeds elsewhere. The latter can be part of your portfolio rebalancing process.
4. Trying to time the market
It’s difficult to predict when the market will rise and fall. Even if the stock market is following a general trend, there will be up and down trading days. Trying to buy and sell based on these daily fluctuations is difficult. While there are professional traders who do this for a living, for most of us this is a losing proposition.
5. Worrying too much about taxes
Taxes can consume a significant portion of your investment gains for holdings in a taxable account. While nobody wants to pay more tax than needed, paying taxes on a gain is almost always better than dealing with an investment loss. However, if you have different accounts, such as a 401(k), which is pre-tax, and a taxable investment account; make sure you have the right assets in each to be tax-efficient.
6. Not paying attention to your investments
Your portfolio needs to be evaluated and monitored on a periodic basis. If you don’t have the time, then hire a professional to do so. Don’t be penny wise and pound foolish.
7. Failure to rebalance your holdings
This goes hand in hand with #1 – having financial plan. You should have an investment policy for your portfolio that defines the percentage allocations of your investments by type and style (stocks, bonds, cash, large stocks, international stocks, etc.). A typical investment policy will set a target percentage with upper and lower percentage ranges for each style. It is important that you look at your overall portfolio in terms of these percentages at least annually. Many financial planning or investment firms have systems that review allocations daily.
Different investment styles will perform differently at various times. This can cause your portfolio to be out of balance. The idea behind rebalancing is to control risk. If stocks rally and your equity allocation has grown to 75% vs. your target of 60% your portfolio is now taking more risk than you had planned. Should stocks reverse course, you could be exposed to over-sized losses.
8. Assuming recent events will continue into the future
The first 15 plus years of this century have been tough on investors. The market tumbled during the 2000-2002 time frame and then again in 2008-2009. More recently the stock market dropped steeply and suddenly in the wake of the Brexit vote in the U.K. These events have instilled fear into many investors. It’s hard to blame them.
However this fear and the assumption that recent events will continue into the future might also be keeping you from investing in the fashion needed to achieve your financial goals. Taking the events of recent years into account is healthy, however letting these events paralyze you can be destructive to your financial future. This holds true for stock market drops as well as protracted bull markets.
9. Building a collection of investments instead of a well-crafted portfolio
Are you investing with a plan or do you simply own a collection of investments? Great football teams like our hometown Kansas City Chiefs have a better chance of winning when everyone embraces and executes their role in the game plan for that week. Likewise, I believe you increase your chances for investment success when all of the holdings in your portfolio fulfill their role as well. For more information, visit our website at makinglifecount.com or contact Matt Starkey –firstname.lastname@example.org, (913) 345-1881.