Seven Common Investor Mistakes
How to Avoid Them
The most common mistake is not taking advantage of employer-sponsored savings plans.
Many US employers match employee contributions up to a certain dollar level, which may be the best deal in the investment arena. Not taking advantage of such a plan is like saying “No” to free money.
Too Much Company Stock
Another common investor mistake is having too much retirement money tied up in company stock. Remember Enron? Most employee retirement accounts became worthless as the company collapsed because the employees over-invested in Enron stock. Many sound companies also use stock to match employee contributions. Don’t add insult to injury by loading up at the corporate trough.
Single Asset Nest Egg
Placing all eggs in one basket is never a good strategy. Diversifying assets will lower portfolio risk while potentially increasing returns over the long run. A large part of portfolio returns depends on how money is allocated and not the specific stocks selected. A healthy mix of cash, stocks, bonds and real estate will offer the best returns over time
Performance
Don’t chase performance. What was hot last year may be the worst investment this year. The manager with the top performance one year may have just been lucky and could fall from grace the next. Have a consistent plan that looks forward not backward, and the discipline to stick to that plan. But looking forward can be difficult. Consider getting help from a professional investment advisor
Insider Trading
Looking ahead is different from knowing more than the market. No one individual can know more than what the market as a whole knows. And few individuals have access to all the factors that go into valuing an investment. Proprietary information is just that, exclusively owned and private. Trading on that “inside information” is illegal and not necessarily profitable. Don’t fall for that trap.
Review and Rebalance
Another common investor mistake is not reviewing and rebalancing investment portfolios. Markets are dynamic and shifts in price will alter the composition of any portfolio. If a strategy calls for a 70/30 stock to bond ratio, and stock prices have gone up dramatically, the portfolio will be is out of balance. Periodically review portfolio positions and percentages. Rebalance to bring the ratio back in line.
Sell
Don’t be afraid to sell. An asset’s volatile price action may be too nervewracking. Sell it. If the investment has been reached, sell it. If cash is needed, implications and tax consequences accepted, sell the asset. If the company’s management has lost its way adversely affecting the share price, sell the stock.
Successful investing is less a function of finding the “big one” and more of not making the little costly errors. Investing success can be built on small wins. However, diversification is an essential element of in any portfolio. Have a plan, know when to say when and have an exit strategy.
Enron
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Effect of Rebalancing
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Nest Egg
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