Depending on your perspective, the financial markets can provide great opportunity to grow your wealth or they can be a source of persistent danger to your financial future.
Of course, there are no guarantees when it comes to investing. No single investment, no matter how strongly it’s touted, can guarantee you a lifetime of easy wealth with zero risk.
But over the long term, savvy investors who make sound decisions and avoid simple mistakes have a much greater chance of reaching their goals and enjoying true financial freedom than those who invest blindly or with unrealistic expectations.
This unbiased report will help you protect and grow your wealth by making smarter investment decisions.
By understanding some of the common investing mistakes that can prove hazardous to your wealth (and learning how you can avoid them) you can give yourself a much greater chance of achieving long-term investing success.
Mistake #1: Relying Too Heavily on Past Returns
It’s a phrase we hear all the time – but we rarely pay attention to it: “Past performance does not guarantee future results”. The truth is, that phrase is not just legal “mumbo jumbo” – it’s actually a pretty valuable lesson to learn.
Let’s say you’re preparing to invest in a mutual fund that you’ve recently read about because it delivered 15% returns over the last 12 months. That’s certainly a great return, but it’s simply a snapshot of the fund’s performance…and it’s no guarantee that you’ll see another 15% return when you invest.
Think of it this way: Just because a baseball player hits 40 home runs in a season…that’s no guarantee that he’ll hit 40 home runs again the next season. Athletes – and investments – have good years and bad years.
It’s true that looking at an investment’s past performance can be helpful in separating the good investments from the bad. But instead of looking at past returns from just one period of time, it’s important that you do a little bit more homework before investing.
Look back to see how the investment performed during a down market – such as 2008 – when most investors saw negative returns. Did the investment you’re considering perform better than other, similar investments during down markets?
If you’re considering investing in a fund…has that fund changed managers? If so, don’t just look at the fund’s most recent performance – investigate the past performance of the fund manager (in both good markets and bad) as well.
- It’s important to always consider not only best-case scenarios when investing for the long term, but also worst-case scenarios.
The more you know about how an investment has performed in different circumstances, the more likely you’ll be able to make an informed investing decision – one that doesn’t simply rely on recent results.
Mistake #2: Setting Unrealistic Investment Goals
One of the things new investors are often guilty of is not having realistic expectations when it comes to their financial goals.
Having exceptionally high expectations can be deadly to your portfolio as you continue chasing goals that could expose you to unnecessary risk.
At the same time, having unclear expectations (or failing to understand what your goals are) could also prove fatal to your financial future.
- It’s important when starting out to understand what makes for realistic expectations.
Take a look at market performance as a whole over a long period of time, at least five years, instead of chasing goals that could ultimately prove unwise or unreachable altogether.
If you’re investing for a long-term goal such as retirement, your investment goals might be different than if you’re investing for a shorter-term goal such as paying for college.
It’s critical that you understand what success looks like – and then manage your expectations as you work toward that success – rather than investing “blindly” and simply hoping for the best.
Be sure you can answer these simple questions at all times:
- What it my ultimate investing goal? Is it retirement? Paying for college? Saving for a second home?
- How long is my time horizon for investing?
- How much risk am I comfortable with? And is this answer consistent with my time horizon?
Mistake #3: Making Emotional Decisions
If there’s one thing you can rely on the media for, it’s the consistent ability to scare investors.
This has happened time and time again over the last several decades.
In 1979, for example, when the Dow was sitting at 800 points, BusinessWeek ran its famous “Death of Equities” cover, proclaiming that the stock market was a disaster and urging investors to stay far, far away. Of course, BusinessWeek proved to be completely wrong about “The Death of Equities” – and investors who ignored their proclamation enjoyed a huge run-up in equities in the years that followed.
It’s important for investor to remember this simple fact: What works to scare viewers – and generate ratings – typically isn’t the best advice for your portfolio.
- It’s important that you remain calm and keep a clear head – no matter if the markets are soaring or crashing.
In the market collapse of 2008-2009, the Dow Jones Industrial Average lost roughly half its value in just six months’ time. Those investors – and there were millions of them – who panicked and sold at the bottom took an absolute beating.
But those who were able to remain calm – and not react emotionally – have seen the market rebound in the years that have followed. Not only have those investors avoided the potentially fatal mistake of selling at the absolute worst time…they’ve also seen their wealth grow as the markets have bounced back.
Mistake #4: Failing to Diversify
There’s a massive, built-in danger to placing all of your money in one investment – or one sector, for that matter.
- It’s critical that you spread your investment resources across as many different types of assets as possible.
That means investing in stocks, bonds, real estate…and maybe even investing in precious metals or holding some assets in cash.
And your allocation of assets to each of these categories should be based upon your unique investing goals, your time horizon and the amount of risk you’re comfortable with.
The reason is simple: if one of your investments takes a sudden, unexpected nosedive you won’t be wiped out.
While diversification doesn’t guarantee you won’t lose money in the markets…it is an important component to helping minimize your risk while investing for the long term.
The truth of the matter is we have no idea which investments, sectors or asset classes will deliver strong performance…and which ones will deliver poor performance.
By incorporating a careful mix of assets (tailored to your individual financial plan) you can avoid the risk of potentially being wiped out by a fast-moving “collapse” in one investment or one sector.
If you had invested in nothing but tech stocks, the explosion of the dot-com bubble in the early 2000s could have wiped you out. Or if you had only invested in real estate, the collapse of the real estate market in 2008 could have delivered a fatal blow.
Remember – the primary goal of diversification is not to help you achieve greater investing returns…it’s to limit your exposure to risk. Because getting “wiped out” in one fast-moving crash of a single sector could prove devastating to your financial future.
Mistake #5: Paying Too Much in Fees & Commissions
If you’re already actively trading, do you know how much you’re paying in fees and commissions?
Brokerages each charge different fees when you buy and sell investments – and often investors simply overlook these fees as “the cost of doing business.” At the same time, commission-based financial planners also take a cut out of your profits…so it’s important to take all of this into consideration. If you’re working with a financial planner who takes a high commission – and you frequently trade investments with high transaction costs, you could be flushing your profits down the drain by paying those commissions and fees.
There’s no question that many investors are often ripped off by brokerage houses charging outrageous or unnecessary fees. But in plenty of cases, investors are throwing money away simply because they aren’t aware of the fees associated with their investments.
It’s worth taking the time to look around at different brokerages and at different investment plans, to find the option with the most reasonable fees that is still right for your situation.
You should also consider examining your investing patterns to help cut down on transaction fees. Instead of buying shares of one investment in smaller chunks, you may be wise to wait and buy your shares all at once in order to cut down on transaction fees.
Mistake #6: Reacting Too Strongly to Market Losses
One of the realities of investing for the long term is that, occasionally, there will be setbacks. Bear markets happen…and sometimes investors can suffer short-term losses. But how you react to those losses can be critical. It’s important to remember that – over the long term – stocks have continued to rise at an impressive rate.
- Since 1928, stocks have returned an average of roughly 9.5% per year – and that includes both up markets and down markets.
No one can know for certain exactly when stocks have reached a “top” or “bottom” – so it’s vitally important that you remain calm in the midst of market volatility.
Mistake #7: Not Reviewing Your Investments Regularly
If you’ve gone to the trouble of establishing a clear investing plan and you’ve put together a diversified, well-thought-out portfolio of investments…it’s important that you check in on those investments from time to time.
- Investors need to evaluate and “rebalance” their portfolios on a regular basis to make sure that the ratios of value in different investments have not become undesirable.
In any given year, some of your investments will deliver better returns than others…and this can impact your portfolio’s balance if you don’t keep an eye on it. Here’s a simple example: If you have two investments in your portfolio and you wish to maintain a 50/50 split between the two, you can invest an equal amount in each to start.
But that ratio…let’s say it’s $50,000 in each – will be impacted by the performance of those two investments. If the first one goes up 20% while the second breaks even, you’d now have $60,000 in one investment and just $50,000 in the second – meaning your split will have changed to 55/45.
That’s a simple illustration, but you can see how, with more investments in your portfolio and greater differences in performance, your portfolio’s balance can easily get away from you.
The simplest way to stay on top of this is to look at your portfolio’s balance at regular intervals (quarterly or annually) and then adjust if required. You can make your adjustments by tweaking the contributions you make to each investment at the start of each interval or you can sell some of the winning investments and re-invest the proceeds in those who have fallen behind.
This may seem a bit counter-intuitive because, at the end of the day you’ll be “rewarding” the losing investments in your portfolio. But the truth is reviewing and re-balancing at regular intervals is an important part of a disciplined investing approach.
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