By Matthew M. Glatt, CPA – Founder and CEO of FLP Financial Group, LLC
Let’s see if this sounds familiar: you researched your investment options yourself, began to follow some practices or tips that you felt made sense, but you’re not seeing the results you hoped for.
If only we were given the chance to learn about investment and wealth management starting in grade school, we’d have far fewer adults making the same mistakes over and over again. But in my experience, that’s not the way this scenario typically plays out. Most people don’t talk to a financial planner until their spending, borrowing, investing and saving habits (or lack thereof) are firmly in place.
In other words, they come to see me once they realize something’s going wrong with their investments.
It won’t be news to anyone when they hear that making mistakes with your money can be incredibly costly. Here is a list of the 7 most common investment mistakes I see people walk into, and advice on how to avoid them.
1. Not Setting Clear Goals
Your goal needs to be significantly more detailed than “I would like to make more money,” yet when you break down the mindset of many inexperienced investors that’s exactly what many are saying. They have some vague goals in mind such as college for the kids or retirement savings, but nothing structured beyond that.
When it comes to investing, your goals need to be crystal clear. Rather than simply saying you want to save for college or retirement, come up with a number. How much is college going to cost by the time your kids are old enough to attend, and how many kids are you sending? At what age do you wish to retire, and what do you expect to be paying for once you do? If you have no benchmarks in place, you can’t measure the success of your portfolio.
You also need to consider aspects such as risk and asset allocation. Are you saving for something far in the future, or 5 years from now? These factors will determine the risks you can take with your portfolio as well as where your money should be invested.
2. Trying to Time the Market
Let’s get one thing out of the way up front: nobody truly knows what the market is going to do tomorrow, next week, or next month. We can watch trends, we can learn from the past, we can predict, and occasionally even a complete novice can make an excellent call and gain a lot of wealth from it – but it’s not the norm.
There is only one hard and fast rule of investing, and that’s this: the market grows over time. The market grows because the global economy is growing, and the longer you have your investments in place, the more you are going to gain from hanging in there.
In other words, taking a “wait and see” approach to investing might be robbing you of valuable returns in the meantime.
3. Doing It Alone
Think about all your investments, your living expenses, your savings, and your financial goals. It’s a little overwhelming, isn’t it? Even the most fastidious record-keeper might be overlooking some better investment opportunities, or better savings plans.
Wouldn’t you rather optimize and gain access to the best possible choices for your unique situation? This is what financial advisors do. Correction: this is what good financial advisors do. Your meetings should mainly consist of long conversations wherein your advisor gets to know you, and stay up to date on your plans, goals, and habits. They should see you as a person, not as a portfolio. If you’re not getting that treatment, switch advisors, but don’t back away from help entirely.
Sometimes, you’re simply a little too entrenched in your situation to look at it analytically.
4. Not Rebalancing
Rebalancing means returning to your original plan as outlined with your advisor, and this is difficult for many investors to do. Why? Because it means backing away from some short term gains that seem extremely tempting. In many cases, it can literally mean selling your best performing asset class, and buying more of your worst performing.
Chasing performance gains like this can actually lead to less overall growth. Remember that you are in this for the long haul, and rebalancing your portfolio is how you maintain the long term payoffs that you will need further down the line.
5. Putting Too Much in One Stock
This mistake can often happen innocently. Many people wind up with stock from their employer, or perhaps inherit stock from a family member that’s all from a single company. If you’re unfamiliar with investing, it might not seem like such a bad idea to keep your stocks as-is, and not bother branching out.
The problem with leaning all your investments on a single company is that there is no buffer between you and a company’s sudden, poor performance, should that happen.
6. Failing to Diversify
Just like it’s risky to invest in a single company, it’s also a bad idea to invest only in one type of asset. This is how some investors can wind up losing a lot of money in the stock market, and winding up in real trouble. Branching out can protect you when a portion of the market performs poorly.
Stocks are good to have as part of your portfolio, but so is real estate. Bonds are another source of investment return, as are sometimes-overlooked assets like jewelry, precious metals, or collectibles.
7. Trading Too Much
It’s fair to say that part of the thrill of “playing” the market comes when you sell stocks high and make a large profit. This can lead some investors to think that if one sale is good, then 20 sales should be great.
Not so fast.
Remember that every time you sell or trade your stocks, you are accruing transaction fees. If you are selling frequently, you may get a rude awakening when you step back and realize just how much you’re paying – and that’s to say nothing of the tax situation you’re creating for yourself. Each stock sale represents either long or short term capital gains, which all have to be sorted out before April 15th.
If your palms are sweating after reading this list, don’t fret too much. There’s a reason these are considered common mistakes, and that’s because a lot of investors make them. You can turn your investment habits around, and learn skills that will help you better understand the entire process. To download a free whitepaper on the investment process, click here.
