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Your Investments: Seven Common Mistakes to Avoid

Written by Guest Contributor - 7 Comments

Your Investments:  Seven Common Mistakes to AvoidBarbara Marquand is a business journalist who writes for GoTalkMoney.com and other financial web sites. She frequently covers personal finance topics, bank industry trends, and credit card news.

Even the brightest Wall Street mavens make investment errors, so don’t beat yourself up if you’ve made a financial misstep or two. Instead, learn from your mistakes and set a better course for your financial future.

Here are seven common mistakes to avoid:

1. Failing to strategize investments

Think about your risk tolerance as you develop a strategy, advises the CFA Institute, a global, not-for-profit association of investment professionals. Know how much money you can stand to lose before you invest, and take into consideration your financial goals and time horizon for investments. Your strategy should aim for a diversified portfolio, with investments in a wide range of industries, companies, countries, and asset classes.

2. Wishful thinking

You need look no further than recent investment scandals as evidence of investors’ wishful thinking. Even sophisticated people are too eager to trust investment pros who promise to perform financial miracles. In his $65 billion Ponzi scheme, for instance, Bernie Madoff reported unrealistically consistent performance to investors, which should have been a red flag that something was wrong. Texas financier R. Allen Stanford, accused of swindling more than $7 billion from investors, reeled in investors with promises of incredible rates on CDs.

3. Paying too much in fees for investments

Ask for the fine print when dealing with a brokerage or trading company, advises the CFA Institute, and understand the fee structure before you invest. Don’t let high fees wipe out investment returns. This goes for stock and mutual fund investments as well as for lower-risk vehicles, such as CDs. Keep in mind you’ll pay fees if you invest in CDs through a broker. Weigh the cost of the fees against the rates the broker offers, and compare the returns to the highest CD rates you can find on your own.

4. Holding onto loser investments too long

Why do investors hold onto obvious losers? The answer comes from the field of behavior finance. In a Wall Street Journal article, Santa Clara University finance professor Meir Statman notes that when faced with losses on paper, investors comfort themselves with the notion that perhaps the investment will go back up. Selling at a loss would mean facing pain squarely, so investors procrastinate and hope for the best, holding loser investments long past their time.

5. Overconfidence

Too many investors think by listening to some tips from financial gurus on cable TV they can do better than professional investors. Overconfident investors tend to trade too rapidly. They don’t do as well as investors who buy and hold diversified portfolios, and they pay more in transaction fees.

6. Neglect of investments

If the tough economy is keeping you from being proactive with investing, then get re-engaged. The CFA Institute recommends setting up a regular contribution program and scheduling regular checkups with your investment professional to keep you focused on your goals and to fix any problems.

7. Buying high and selling low

If you buy a stock after it’s peak, you’ve missed its growth potential. Likewise, many investors bail from the market when it tanks. But when stocks are down, that’s the best time to buy because prices are low and growth potential is high.

You can’t be a perfect investor, but you can prevent a lot of financial heartache by using common sense and avoiding the most common mistakes.

Published on March 12th, 2010 - 7 Comments
Filed under: Saving & Investing

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7 Responses to “Your Investments: Seven Common Mistakes to Avoid”

  1. 1
    John @ The Financial Ladder Says:

    I really have to work on 4 and 6…

  2. 2
    CB Says:

    I’m studying Phil Town’s books (Rule #1 and Payback) to learn how to pick good companies and buy them when the price is such that they are a bargain.

  3. 3
    myfinancialobjectives Says:

    Great points. A lot of these things almost make up one rule I have read about many times over:

    Take your emotions out of investing.

    Many many books have advocated this as a way to make more SOUND decisions. After learning about this concept, I realize how hard it truly is not to be invested emotionally in my investments. (I’m speaking about investments such as stocks, money that if you lose, you can still pay rent and buy groceries. We all know that you should never put money in the stock market that you need to rely on.)

  4. 4
    LC Says:

    #7, is a no brainer to say…not so easy to do. How can anyone know when it’s reached it’s peak? How do they know not to get out (or the inverse TO GET OUT) when necessary? It was pure luck I got mom out of GM. I would like to learn more, but get so many different opinions. I read Phil Town’s 1st book. I couldn’t figure out the system. I guess I am too dumb. It all seems a system of “guessing.”

  5. 5
    The Biz of Life Says:

    #1 and #3 speak to me. Each investor has to ask themselves– how much is enough…. and that will determine amount of risk they need to take. The higher the needed return the higher the risk.

    Then the tyranny of compounding costs…. I’m a passive investor so I aim for the lowest cost index funds to meet my asset allocation targets. I contribute regularly and rebalance periodically, and have very low investment turnover. Thus far this was worked well for me.

  6. 6
    daddy paul Says:

    You nailed it with this article. Most of the mistakes people make with investing are emotional. Jessie Livermoore realized this and hired a psychologist.

  7. 7
    AdamP Says:

    How do you distinguish between #4 and #7? i.e. if your investment goes down, do you follow #4 and hold, or follow #7 and sell? This sort of simplistic advice always seems pretty useless to me, but I think it’s particularly amusing to see conflicting advice on the same list.

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