Mistakes happen in the personal financial world. We can learn from our own mistakes, and others’, to improve our results. Consider this assortment of common investor gaffes, and do a status check of your own plan to ensure these do not inhibit progress toward your long-term goals!
1. Ignorance is not bliss
“Stay the course,” is a common phrase to describe remaining invested and consistent with your plan through good, and lean, markets. This does not mean ignoring your portfolio for long periods. Rebalance periodically to remain consistent with your risk tolerance and long-term goals. Pay special attention to ongoing fees.
2. Watch costs
Repeating the previous comment is not an oversight, but meant for emphasis. Overlooking fees can create significant drag on long-term return and, thus, realization of your goals. The two most common costs are trading frequently (transaction fees and/or commissions) and investment vehicles’ internal costs (expense ratio).
3. Lack of Diversification
Diversification, executed correctly, is a cornerstone of wise investing. Unfortunately, it is one of the most misunderstood terms in the financial world.
Few investors realize that a relatively small number of popular stocks form the core of many mutual funds, albeit in different allocations. So, while attempting to diversify with a number of mutual funds, many investors actually end up concentrated in that pool of stocks.
Similar problems arise when you pick a number of individual stocks to own, believing that makes you diversified. Many times the stocks you choose will behave similarly. Engaging multiple advisors can also be an ineffective diversification tactic. This strategy often increases cost and complexity, with no clear benefit. These mistakes can leave you less prepared to weather a market downturn and, potentially, put you at increased risk of loss.
4. Letting emotions drive decisions
We’re all irrational. When that tendency creeps into our investing, bad things happen. Buying high and selling low because of fear or greed stemming from the latest headline is an all-too-common investor mistake. Sticking to your long-term plan and allocation is absolutely critical. Ignore the short-term noise.
5. Start early
The best time to start investing is yesterday. But it’s never too late to start, regardless how much or little you think you can save. The market won’t wait for you to decide, either.
6. Uncle Sam
A cost many investors ignore is the tax ramification of their portfolio. The tax consequences of dividends or gain from sales in non-qualified accounts can be significant. An actively-managed investment approach and/or a faulty distribution strategy can result in sizeable tax liability.
In summary, focus on what you can control:
- Minimize costs
- Establish a long-term plan (and stick to it)
- Rebalance systematically
- Manage tax impact
- Save, save, save
And of course, stay diversified.
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