Investing for your current financial situation and your future can be complicated which can lead to many people making mistakes. Here’s a list of some of the most common investment mistakes.
1. Lack of Proper Diversification
As famed investor John Templeton once said, “The only investors who shouldn’t diversify are those who are right 100% of the time.” (1)
Why? A portfolio consisting of multiple investments with the similar return potential and low correlation to each other has historically offered better risk adjusted returns to a portfolio of highly correlated investments with similar return potential.(2)
An important principle of Diversification is finding and investing in assets with low correlation to each other. What is correlation? It’s the amount of the movement in one investment that can be explained by the movement of another investment.
Therefore, the goal is to seek out investments that are not perfectly correlated.
Diversification is not a cure all and it can’t protect against losses. But it’s important to be aware of as you set your own investment allocation.
That allocation should include determining when you will need the money, and your tolerance for risk and fluctuation. Everyone is different
The idea is that when some investments aren’t performing well, others that may be doing well can balance things out. (2)
2. Too Short of a Time Horizon
If you are saving for retirement, what the stock market does this year or next shouldn’t be the biggest concern.
Even if you’re retiring at age 70, your lifespan may be longer than you expect. Many people now live well into their 90s. If you expect to leave some assets to your heirs then your time horizon is even longer. Investors can be too focused on the short-term.
3. Focusing on the Financial Media
There is almost nothing on financial news shows that can help you achieve your goals. Turn them off.
There are also few newsletters that can provide you with anything of value. Even if there were, how do you identify them in advance?
Think about it – if anyone really had profitable stock tips, trading advice or a secret formula to make big bucks, would they sell it for $49 per month? Not likely. Instead, they’ keep it quiet, make their millions and wouldn’t be selling newsletters. Remember, there’s a lot of money in selling information. Useful or not.
4. Checking account balance online too often and making decisions based on daily movements
We have almost unlimited and fast access to information. That’s not always a good thing.
Remember that your daily account value is a snapshot of a moment in time. Daily movements are often not representative of what the future holds.
Monitor your investments, but make decisions based on long-term goals.
5. Freaking Out in Market Drops
Prepare for volatility. Wall Street can be scary. This isn’t new. The 2008-09 market meltdown saw the Dow lose significant value in less than a year. Many investors who saw their assets disappear on paper pulled out at the worst possible time—the bottom.
Yet five years from that 2009 market bottom, the Dow was up roughly 10,000 points to a record 16,000-plus. (4)
6. Basing investments on whether the market will go up or down
Timing the market to invest when the market is on the upswing, and pulling it out when the market is on the downswing are rarely successful.
Market timing rarely works because you have to make two predictions. First when to get out to reduce losses. Second when to get back in to participate in gains.
Remember, financial “gurus’ make money by selling newsletters and making predictions. If their predictions were really accurate, they’d be too busy investing to sell information. (5)
7. Hindsight error
Because you see the past clearly, you think you’ll also be able to tell the future. Hindsight error is common because many people are convinced they saw the crash coming in 2007. In reality, they may have thought a crash was possible, but they also thought the market might continue to zoom upward.
(1) https://whatwouldjohntempletonsay.com/2009/09/29/lauren-templeton-on-john-templeton-and-diversification/
(2) http://seekingalpha.com/article/1204841-the-importance-of-correclation-in-diversification
(3) http://www.msn.com/en-us/money/mutualfunds/8-biggest-mistakes-investors-make/ss-BBcCVdi
(4) http://finance.yahoo.com/echarts?s=%5EGSPC
(5) https://www.amazon.com/Mistakes-Every-Investor-Makes-Avoid-ebook/dp/B00LIV4N94?ie=UTF8&*Version*=1&*entries*=0
The opinions voiced in this article are for general information purposes only. They are not intended to provide specific advice or recommendations for any individual, and do not constitute an endorsement by Sagepoint. Please remember that investment decisions should be based on an individual’s goals, time horizon and tolerance for risk.
