Barbara 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.
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.