Investing isn’t terribly difficult, but it’s a specialized area that requires careful navigation.A huge industry has evolved to use a multitude of clever ways to separate people from part of their retirement savings without necessarily providing them much benefit in return.
Think of investing as a journey.You start at one place and head for another.The best route may be efficient but boring. Investing is about taking risks. But along the way there are hundreds of distractions and opportunities to get you off the track.We’ll look here at some of the more serious ways that typical investors work against their own interests. Most investors occasionally take way too much risk. Sometimes they don’t take as much risk as they should. Investors pay too much of their hard earned savings to other people who are not necessarily on their side.
Without getting any particular benefit in return, too many investors give up liquidity, making it costly and inconvenient to get their money back when they need it. They put their money into investments they don’t understand, leading to grief, loss and disillusionment that sometimes prompts them to give up altogether.
Mistake No. 1: No written plan People with written plans for their investments wind up with much more money during retirement than those who don’t have written plans.This document should spell out your main assumptions about inflation, future investment returns, how much you’ll save before you retire, when you will retire, the amount of money you’ll count on from fixed sources such as pensions, Social Security, and perhaps part-time employment, as well as the amount you’ll need to withdraw from your portfolio in retirement.Your written plan should specify how you will make asset allocation choices and where you’ll get professional help when you need it.
Mistake No. 2: Procrastination If you wait for the “right time” to get your investments organized or reorganized, the wait could ruin your results over a lifetime.The longer you wait, the less time you’ll have.Time is an investor’s best friend.
Mistake No. 3: Taking too much risk People who take too much risk often wind up being speculators rather than investors. Savvy investors, on the other hand, pay a lot of attention to limiting and managing risks.
Mistake No. 4:Taking too little risk Some people are paranoid about losing any money at all. If you’re saving for retirement 25 years down the road, and you opt for a very conservative mix of investments that is expected to return 7 percent annually instead of an all-equity portfolio with an expected annual return of 12 percent, you may be massively shortchanging yourself.
Mistake No. 5:Trusting institutions You and your bank have a classic conflict-of-interest. Your best interests are served by an account that pays the highest interest along with penalty-free access.Your bank’s best interests are served by accounts that pay you little or no interest.
Mistake No. 6: Believing the media Serious investors need textbooks more than hot ideas. But most people would rather have entertainment, and that’s what broadcast outlets and financial publications provide.The purpose of the articles is to get you to buy the publications.
Mistake No. 7: Failing to take small steps that can make big differences Far too many people fail to make their IRA contributions at the start of the calendar year. Others leave money in taxable accounts instead of sheltering it in retirement accounts. Each of these steps seem small by itself.Yet over a lifetime they can make a big difference – but only to people who act.
Mistake No. 8: Buying illiquid financial products Liquidity is severely compromised when you invest in limited partnerships, for which there is often no market. Liquidity is also impaired with variable annuities and load mutual funds.
Mistake No. 9: Requiring perfection in order to be satisfied People who can’t stand to have anything but “the best” solution seldom make successful investors. Perfectionists often flit from one thing to the next, chasing elusive performance. In real life, you get a premium for risk only if you stay the course.
Mistake No. 10:Accepting investment advice and referrals from amateurs Too many people make financial decisions based on things they hear casually. But as painful as it is, there are no safe shortcuts to wealth.
Mistake No. 11: Letting emotions drive investment decisions The desire to make money is legitimate. But unless it is tempered with a healthy respect for risk, it turns into greed. Likewise, the desire to avoid or limit losses is legitimate. But when it is allowed to run amok, it turns into fear.
Mistake No. 12: Putting too much faith in short-term performance Many investors, especially inexperienced ones, spend far too much time and energy trying to forecast what essentially cannot be forecasted: short-term performance.
Mistake No. 13: Overconfidence Many overconfident investors put too much of their money into a single stock or single fund.Then they get emotionally attached and their attachment takes on a life of its own. By the time such an investor is willing to admit that things have changed, he or she will probably have stayed much too long.
Mistake No. 14: Focusing on the wrong things It’s generally accepted that asset allocation accounts for more than 90 percent of investors’ returns.That leaves less than 10 percent for choosing specific stocks and mutual funds – the very thing on which most investors spend almost all their time and energy.
Mistake No. 15: Needing proof before making a decision The ultimate stalling tactic for investors who aren’t ready to make a move is to require one more piece of information or evidence.You can get evidence for just about any view of the market you want, but you cannot get proof.
Mistake No. 16: Not knowing how to deal with the first 15 mistakes The cure for all these mistakes may seem obvious, but they are not necessarily easy:
• Make sure you have a written investment plan.
• Educate yourself.
• If you don’t understand an investment, don’t put your money in it.
• Sometimes the best course may be to simply slow down.
• If you notice that emotions are driving your decisions, substitute a discipline.
• In the end, the best one-word prescription for avoiding most mistakes is diversification.