If you feel the need to do investment planning, congratulations! That means your original financial planning — or simply sensible budgeting — is on the right track. So, you have the resources, but you may be stuck in a state of analysis paralysis. Maybe you're just getting your feet wet in the investing game and are afraid to make errors or maybe you've been playing the market for years and are looking for ways to improve your game. To help you avoid costly mistakes, here are five of the most common mistakes investors make.
1. Lack of Investing Goals and a Way to Reach Them
You need to articulate your investment goals and employ the best financial tools to reach them. If retirement is way over the horizon, your investment plan needs to include both shore and long-range goals.
Moreover, if you write out your goals answering questions like why, how much, how long, and how risky, you are on the road to a plan. The plan could be as modest as saving up for a $25,000 car or as ambitious as a million-dollar retirement fund. The important thing is to plan.
2. Putting All Your Investments Into One Vehicle
Or, as the saying goes, “putting all your eggs in one basket.” Most people don’t diversify their investments much. Investing all your extra cash into a money market or stock fund, for example, can be a vertigo-inducing wild ride to the giddy heights of temporary gains down the slippery slope of market adjustments.
Investment managers recommend spreading funds across different types of investment vehicles. Typically, when stocks go down, bonds do quite well. A spread of cash, bonds, stocks, and real estate can keep your investment portfolio healthy.
Also, even though savings accounts don’t earn much interest, it's never a bad idea to have a safe, emergency cash reserve for obvious reasons.
3. Listening to Investment Hype
We all get those glitzy emails extolling the virtues of moving our money to “safe harbors.” Then there is the evening news where it seems the bottom is dropping out of the U.S. stock market because of some disaster or political event.
The fact is that the media tends to press the panic button and then move on to other news. Remember that the media feeds on sensationalism and the accompanying hype and fear. They are in business to keep their viewing public’s attention glued to the falling sky.
The real world of investment planning lies somewhere between the high promises of “experts” and the doom and gloom of the latest news cycle. If you have a sensible and diversified investment plan, you should stay the course.
4. Giving Too Much Weight to Tax Consequences
You pay income tax on investments that give nice returns. But if you have a money market account that is doing wonderfully, you still might be tempted to cash it in when you see the income tax bill.
Nevertheless, you should avoid the temptation of moving your money to some tax-deferred account that earns less and ties up your money more. Think about the overall performance and earnings of your investment portfolio before worrying too much about a few dollars in extra taxes.
5. Getting Soaked by Trading and Account Transaction Costs
Transaction fees, commissions and other charges can take a heavy toll on your investment assets. When working with a financial advisor, ask him or her about their investment planning fees. Follow the advice on this SEC Investor Alert1 and always demand transparency from your advisor.
You need an investment plan, and the plan must have goals. Your plan should be diversified so that if one asset takes a hit, the rest will ensure continued health. Avoiding tax consequences can be an investment motivation, but don’t let a few dollars tax liability be your main concern. Finally, stay on top of investment account charges and commissions.