Avoid These Investing Mistakes
Investing is a great way to save for retirement or a college education for your children. It inherently involves risk, but having a plan and a strategy can help reduce that risk. Here are some pitfalls to avoid to maximize the value of your investments.
Investing without a plan
Make sure your investments are well thought out and are based on a solid plan. You wouldn't take a long trip in your car without a map (or GPS) to guide you to your destination. Investing is done best with a goal in mind, whether you’re investing for your future, for your kid's future, or something else.
Mistiming the market
Few if any investors have been able to consistently and accurately time the stock market. Buying at the low point and selling at the top happens, but believing that you have an extraordinary ability in that area will more than likely lead to disappointment and investment losses. A better approach is to develop a long-term strategy that is tied to your goals, time horizon and risk tolerance.
Collecting investments vs. building a portfolio
A friend talks up a stock they've made money with, and you jump on board. You invest money in a hot new market sector. You pick up shares of a highly visible IPO. Soon you have a collection of investments that were assembled with no rhyme or reason.
A better approach is to build a portfolio based on your goals. Decide upon percentages you’d like to place in stocks, bonds and cash, along with sub-asset classes. Use investments in each asset class that are appropriate, and be sure to have a reason for choosing each one – whether you target mutual funds, ETFs or individual stocks and bonds.
Apply this portfolio approach across all of your accounts including retirement accounts, taxable accounts and others.
Focusing on the tax implications
As the saying goes, “Don't let the tax tail wag the investment dog.” Managing your tax liability is an important tactic in the larger context of managing your investments. However, focusing on tax savings instead of the investment implications of a given transaction can result in ill-advised moves that result in your portfolio taking on too much or too little risk for your situation.
Failing to rebalance your portfolio
Markets go up and down over time. Different types of investments will perform differently. Your portfolio may start with a specific allocation, perhaps it is 65% stocks and 35% bonds and cash. In a period of strong performance for stocks, this allocation could go to 75% or more in stocks due to their strong performance relative to the rest of your holdings.
Left unchecked, this increase in the percentage of stocks could add risk to your portfolio. To maintain an appropriate level of risk for your objectives, you’ll want to periodically rebalance your portfolio's allocation. In other words, you will need to sell holdings in asset classes that exceed your target allocation and redirect those funds to areas where you are now under-allocated.
Depending upon your situation, there are many ways to rebalance. One is by directing new money to under-allocated areas. You can also do this in accounts like retirement accounts, to avoid capital gains taxes if appropriate. Many 401(k) plans offer an auto-rebalancing feature that allows you to rebalance to a target allocation periodically, such as annually, every six months, etc.
The inability to take a loss
Sometimes an investment just doesn't work out. Perhaps you bought a stock and it has since dropped in price – yet you are determined to wait to sell until you break even on your investment. Why? Perhaps its pride or an inability to admit you were wrong.
The better route is to determine what the future prospects of this investment are, and to ask yourself if you'd buy this stock, ETF or mutual fund today. If the answer is no, and the future prospects aren't great, it's time to sell, take your losses and move on. If held in a taxable account, you can even get a tax break on your loss.
Ignoring your investments
Checking the value of your investment accounts each day is not necessary or even wise for most long-term investors. The daily gyrations of the stock market shouldn't be of concern to you.
But this doesn't mean you should ignore your investments. You need to review your holdings and your asset allocation periodically, to ensure that you are on track. As far as your holdings go – has something changed as far as the management, the expenses or the objectives for mutual funds that you hold? How are they doing relative to other funds with the same investing style? How are your individual stocks doing relative to the price targets you've set for them?
Have movements in the stock or bond markets caused your asset allocation to get out of whack? More important, has your situation changed, requiring a reevaluation of your investment strategy?
In the final analysis…
Investing is an ongoing process that takes strategy and periodic review. Your investments should be tied to your goals, your time horizon and your risk tolerance. These factors may change over time, and you should adjust your portfolio accordingly.
*All content provided in this blog is supplied by Roger Wohlner and is for informational purposes only. Barclaycard makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.
Image credit: Shutterstock