Making mistakes is part of the learning process of controlling your finances and investing. However, the use of common sense can help you avoid making poor financial decisions. Knowing some of the common investing errors can help you to avoid going down a rocky path of losing money. Here are seven of the most deadly mistakes you need to avoid.
1. Not Setting Goals for Your Investments
The first thing you need to do is to figure out what your goals are for your investment. Is this going to be a short-term investment or is it going to be long-term? A big part of your ability to tolerate risk is based on the amount of years you have to let your investment grow.
You can be confident that over the long-term an investment in the stock market will grow. However, short-term volatility can hurt your savings. It’s important to make sure you invest in a safe investment like CDs if you will need the cash within a year.
2. Not Having an Emergency Fund
Many people dread having too much cash in a savings account. This is especially true when the account pays next to nothing. However, the emergency fund plays an important role in the portfolio of investments. Over the long-term, a diversified portfolio of assets will grow over time. However, you will need to have available cash in case you need money for special occasions. (For related reading, see: Why You Should Have an Emergency Fund.)
The cash you accumulate in an emergency fund helps you to avoid liquidating investments during the worst time. You should always have enough cash and conservative investments to let volatile investments grow.
3. Not Applying a Specific Strategy
As a savvy investor, you need to decide what type of strategy you would like to follow. Will you be investing in a diversified set of asset classes and rebalance when triggered? Will you analyze market data to find under-priced companies? Before you put any money in the market, you need to make sure you know what and when you should be buying and selling. Being consistent within a strategy will improve your success.
4. Not Knowing When to Move on
Another important aspect of investing is to know when to move on. It’s difficult for many investors to sell an investment for a loss. They often prefer trying to get back to even instead of looking for a better opportunity. You should always ask if you would add money into this position. If the answer is no, it might be time for you to look for something else to invest in. (For related reading, see: Signs It Might Be Time to Sell.)
5. Not Having a Rebalancing Strategy
Many investors fall in love with their investments. The investment might have been one of their few investment successes and they want to hold on to it. But we all know that the goal of every investor is to buy low and sell high. However as any investor could tell you, it’s easier said than done.
Having a rebalancing strategy can help us do just that. Rebalancing a portfolio forces an investor to sell portions of their winning investments. It also forces an investor into buying a little more of their underperforming assets. This technique can help reduce risk over the long-term as over-priced assets tend to fall harder.
6. Paying Too Much Attention to Taxes
I understand nobody wants to pay more than their fair share of taxes. If you have money invested outside of your retirement account, you might have to pay significant taxes on any capital gains you accumulate. However, would you rather see your portfolio lose 30-40% of its value because you didn’t want to sell or take your gains and pay the 15-20% taxes you will have to pay? By the way, tax harvesting is a good technique to help you lower the pain.
7. Paying Little Attention to Fees
Many investors don’t try to find out how much value they get for the investment fees they pay. There are so many great low-fee investment options these days. However, many investors are still lured by the promise of a better product which often comes with a high cost. Make sure you talk to a qualified investment manager that will explain what you are paying for. Paying higher fees normally means that performance will be subdued.
As we’re living longer and employer pension plans are disappearing, it’s important to invest properly. However, it’s sometimes overwhelming to find the right information. It doesn’t need to be complicated. A sound and consistent plan is very often the best one to implement.
(For more from this author, see: What Does Financial Freedom Mean to You?)
IMPORTANT DISCLOSURES: MoneyCoach LLC and/or Patrick Traverse offer Investment advisory and financial planning services through Belpointe Asset Management, LLC, 125 Greenwich Avenue, Greenwich, CT 06830 (“Belpointe), an investment adviser registered with the Securities and Exchange Commission (“SEC”). Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services Belpointe Asset Management offers, or that or its personnel possess a particular level of skill, expertise or training. Insurance products are offered through Belpointe Insurance, LLC and Belpointe Specialty Insurance, LLC. MoneyCoach LLC is not affiliated with Belpointe Asset Management, LLC. Additional information about Belpointe Asset Management is available on the SEC’s website at www.adviserinfo.sec.gov.