Common Financial Mistakes
Investments are a critical component of a well-rounded financial plan. Many financial mistakes made while investing are easily avoidable, and are usually derived from emotions or lack of information. Some investment mistakes can have serious long-term effects. Below are a few common investing mistakes to avoid.
EMOTIONAL DECISIONS LEAD TO FINANCIAL MISTAKES
Many people struggle to separate their emotions from investing, whether it is fear, greed or another emotion. Emotional investing can lead to quick decisions that can negatively affect your short and long-term investment performance. Education is the best defense against emotional investing. The more knowledgeable you are about the markets, the more you can avoid making emotional mistakes. A plan is also essential, if you stick to a plan created by your fiduciary certified financial planner, then you will be able to eliminate these emotional mishaps.
BEING TOO RISKY/CHASING RETURNS
Everyone has a different level of risk tolerance. Some tolerance can be beneficial, but too much may work against you. Chasing returns by purchasing what is doing well today is not a sound investment strategy. The top performing securities and asset classes of today are usually not the same the following year. Past performance is no guarantee of future performance. Your goal should be long-term appreciation from a well-diversified portfolio, not a get rich quick scheme.
ATTEMPTING MARKET TIMING/TRADING TOO MUCH
Timing the market is said to be nearly impossible by most wall street professionals. Switching from one strategy to the next based on short-term performance can devastate long-term results. Maintaining a long-term disciplined investment strategy, even when short-term results create incredible pressure to abandon the strategy, is one of the most important factors to achieve your financial goals.
BEING TOO CONSERVATIVE/IGNORING INFLATION
Being too conservative may not seem like a bad thing, but your savings may not keep up with inflation. A dollar today may be worth less than a dollar in 10, 20 or 30+ years due to inflation. Focus on your real rate of return, which is your investment return after taxes, fees and inflation. Your real rate of return is an important component of a secure long term plan
NOT UNDERSTANDING YOUR INVESTMENTS
Always understand your investment before putting your hard earned money into it. If an investment or strategy seems overly complicated, either learn about it or find a simpler approach. You should never feel pressure to purchase anything, associate yourself with a fee only financial planner to get the best impartial advice. Take your time and do your due diligence and/or consult with a family member, friend or a professional.
NOT DIVERSIFIED/TOO CONCENTRATED
A well balanced, diversified portfolio should be allocated among various global asset classes to help reduce risks and ensure consistent returns. Diversification among asset classes can be more influential for long-term portfolio performance than the selection of individual securities. Read this article to learn how to keep your portfolio balanced in the long run.
NOT MONITORING YOUR INVESTMENTS
Checking your investment performance excessively is unnecessary; however, monitor your investments periodically so you know when to rebalance your portfolio to maintain the proper allocation and risk level.
NOT GETTING STARTED
Getting started can be a hurdle for some people, especially in volatile markets. Avoiding or having no plan may be the easiest option, but it will certainly not make you better off.
There is a lot to consider when investing, including establishing clear objectives and determining your risk tolerance, time horizon, liquidity needs and taxes. Taking your time to become educated about investing, doing your due diligence and managing your emotions are important for long-term investing success. If you don’t want to manage your own investments, a financial advisor can review and manage your portfolio.