And How to Avoid Them
Investing is one of the best ways to build your wealth and help achieve your long-term financial goals. However, several common and expensive missteps have the potential to derail your investment progress. Recognizing the following mistakes and taking proactive steps to avoid them will likely improve your investment outcomes and, ultimately, give you a better chance of achieving your long-term financial goals.
#1 – Chasing the trends
A common mistake many investors make is choosing investments based on short -term market forecasts and chasing current trends without first researching and doing their due diligence. Without a full understanding of each investment in your portfolio and its risk and return characteristics, underlying holdings, costs, etc., how can you know your investments align with your objectives?
It’s critical to educate yourself on various investments’ risk characteristics, return potential, underlying holdings, tax treatment, asset class characteristics, expenses and more. Your wealth manager is a great source for insight into how specific investments may impact your overall portfolio and financial goals.
#2 – Making emotional decisions
When it comes to investing, emotions such as fear and greed can be powerful motivators. However, the health of your investment portfolio depends on your ability to make rational, long-term decisions and avoid making impulsive moves, such as buying at market peaks or selling during a downturn.
A great way to avoid making emotionally driven investment mistakes is by sticking to a long-term investment strategy customized to your overall financial plan and aligned with your objectives. You should review and rebalance your portfolio on a regular basis to help ensure it continues to keep up with your ever-changing life and goals.
#3 – Failing to properly diversify
Regardless of where you live, it’s always wise to maintain a diversified investment portfolio. Investing in different types of asset classes will spread out your risk. When one sector or investment type is performing poorly, another investment type that’s performing better can help smooth out overall portfolio volatility. While diversification won’t prevent losses, it can reduce the risk of being too heavily invested in the worst performing part of the market.
To achieve adequate diversification, consider combining stocks with bonds, large company stocks with small company stocks, U.S. stocks with international stocks, and investments from different sectors, such as technology, financial, energy, real estate, healthcare, etc. It’s also important to be aware of the underlying holdings in your investment funds to ensure you’re not overly weighted in a certain area.
#4 – Trying to time the market
Knowing that the market is unpredictable, time in the market is more important than trying to time the market by buying low and selling high. This strategy can backfire on even the most seasoned investors. Attempting to predict short-term market movements is risky and can lead to missed opportunities or significant losses.
Instead of timing the market, smart investing involves patience and a long-term investment approach that aligns with your goals and time horizon. Invest regularly and consistently, take advantage of dollar-cost averaging and maintain a diversified portfolio. Over time, this strategy will help smooth out some market volatility.
#5 – Forgetting to plan for risk
It’s important to take risk into consideration when building your investment portfolio. Taking on too much risk can lead to stress, worry and, potentially, panic selling at inopportune times. On the other hand, investing too conservatively may limit your long-term growth potential. Conduct a thorough, honest review of your risk tolerance and take that into consideration as you work to ensure an appropriate balance between risk and return potential.
#6 – Ignoring investment costs
Investment expenses, such as management fees and commissions, have the potential to greatly reduce your portfolio’s returns over time, yet many investors overlook these costs. It’s important to compare fees and expenses across different investment options and choose low-cost investment vehicles, such as index funds or exchange-traded funds (ETFs), whenever it makes sense to do so.
#7 – Not rebalancing
It’s important to regularly review and rebalance your investment portfolio to help ensure it remains aligned with your objectives. Failing to rebalance on a regular basis can result in certain investment types or sectors becoming overweighted. Over time, this can cause your portfolio to drift away from your target risk profile.
By regularly rebalancing to your asset allocation, you can lock in gains from top-performing sectors and ensure your portfolio remains in line with your investment objectives and risk tolerance.
#8 – Neglecting the power of compounding
Compounding is a powerful force that can significantly increase your investment returns over time. The earlier you begin saving and investing, the more compounding interest works to your advantage. Focus on re-investing your dividends and maintain a long-term approach to your investment portfolio to maximize your compounding potential.
Could you use some help establishing a custom investment portfolio to meet your specific needs? Creative Planning is here for you. Our experienced professionals serve as a partner in helping you avoid common pitfalls as you work toward achieving your long-term goals. For more information, schedule a call with a member of our team.