"I know I should do this but I don't know where to start" is a common through running through all our heads. If you feel like you need to take a hard look at your investment planning, congratulations! You're on the right track. Maybe you're just getting your feet wet in the investing game and are afraid to make errors or maybe you've been playing the market for years and are looking for ways to improve your game. Whether it's competing priorities, lack of time or, more commonly, confusion from all the conflicting information, we're often in a state of paralysis with our investments. To help you avoid costly mistakes, here are five of the most common mistakes investors make.
1. Lack of Investing Goals and a Way to Reach Them
Without your "Why", you can't plan out your "How". You need to articulate your investment goals and employ the best financial tools to reach them. If retirement is way over the horizon, your investment plan needs to include both shore and long-range goals.
Moreover, if you write out your goals answering questions like why, how much, how long, and how risky, you are on the road to a plan. The plan could be as modest as saving up for a $25,000 car or as ambitious as a million-dollar retirement fund. The important thing is to plan.
2. Putting All Your Investments Into One Vehicle
Or, as the saying goes, “putting all your eggs in one basket.” Most people don’t diversify their investments much. Investing all your extra cash into a money market or single stock fund, for example, can be a vertigo-inducing wild ride to the giddy heights of temporary gains down the slippery slope of market adjustments. We see this commonly with employees and owners holding huge concentrations of their company stock. We feel familiar and loyal to the company but this mistake can cause serious damage to our financial future.
Investment managers recommend spreading funds across different types of investment vehicles. Typically, when stocks go down, bonds do quite well. A spread of cash, bonds, stocks, and real estate can keep your investment portfolio healthy. Also, beware "false diversification" and make sure your mutual funds aren't all holding the same thing.
Also, even though savings accounts don’t earn much interest, it's never a bad idea to have a safe, emergency cash reserve for obvious reasons.
3. Listening to Investment Hype
We all get those glitzy emails extolling the virtues of moving our money to “safe harbors.” Then the 24 hour news cycle constantly telling us the bottom is dropping out of the U.S. stock market because of some disaster or political event.
The fact is that the media tends to press the panic button and then move on to other news. Remember, boring doesn't sell ads. The media feeds on sensationalism and the accompanying hype and fear. They are in the business of selling advertising, not helping their viewer make prudent financial decisions.
The real world of investment planning lies somewhere between the high promises of “experts” and the doom and gloom of the latest news cycle. If you have a sensible and diversified investment plan, you should stay the course and tune out the gurus and fear mongers.
4. Giving Too Much Weight to Tax Consequences
You pay income tax on investments that make money. All too often, we get hyper-focused on tax-avoidance, rather than tax efficiency. There's a big difference.
Avoid the temptation of moving your money to some tax-deferred account that earns less and ties up your money more. The first step is always to maximize my potential returns, for my chosen risk THEN look at making it tax efficient.
5. Getting Soaked by Trading and Account Transaction Costs
Transaction fees, commissions and other charges can take a heavy toll on your investment assets. There's a reason we see commercials offering free trades and user-friendly trading platforms. When you trade, they earn revenue, and it can hamper your returns.
When working with a financial advisor, ask him or her about their investment planning fees, any commissions, etc. Follow the advice on this SEC Investor Alert1 and always demand transparency from your advisor.
You need an investment plan, and the plan must have goals. The plan you set, serves as your "Rule Book". It can lay out our To Do List of investments and, often more importantly, our To Don't List. Your plan should be diversified so that if one asset takes a hit, others can ensure continued health. Avoiding tax consequences can be an investment motivation, but don’t let a few dollars tax liability be your main concern. Finally, stay on top of investment account charges and commissions. At Fourth Point Wealth, we're here to help clear this fog and change client lives. Ask us how.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.