There are a few investing errors that many people make — mistakes that are detrimental to their overall investment strategies. Here are the Deadly Sins of Investing that you should avoid…
- Not taking your goals into account
Make sure that the investments in your account and their risk levels reflect what you are trying to accomplish. If retirement is 20 years away, and you have your money sitting in cash or bonds, you may not reach your goals. Conversely, if you plan to buy a house in six months, and you have that money invested in the stock market, you might lose your money and not be able to recover the loss in time to buy a home.
- Basing your investment strategy on someone else’s risk tolerance
You wouldn’t buy shoes based on someone else’s shoe size, would you? So why would you copy your friend’s portfolio holdings without taking into account your own goals and risk tolerance?
- Making too many short-term moves with your long-term money
While buying and selling stock can be fun, it should be done with money that is not intended for your long-term goals. If you are really set on short-term buying and selling, open an account that is just for “play money” and leave the rest of your “serious money” in well diversified, long-term investments.
- Having too much money in one investment
If your income depends on your salary from a company, make sure your investments don’t also depend too heavily on the same company. A good rule of thumb is to have no more than 20% of your investments in any one company’s stock — and ideally closer to 10% or less.
- Not knowing what you’re actually invested in
You don’t need to know the exact stocks in the index or mutual fund that you have, but you should have a general idea of what is in your portfolio. If you use a financial advisor to manage assets, and you have no idea what they’re doing with your money, ask him or her to break it down for you in simple terms or, graphs and charts.
- Basing investment decisions on the news
You can’t predict what’s going to happen in the market based on what you read in the news. It can’t tell you that the stock market is really going to tank tomorrow, and that you should sell everything and go to cash. Research shows that having a well-diversified portfolio that you leave alone is a better strategy than trying to time the market.
- Not saving enough
This is crucial. If you aren’t saving enough, it is going to be really hard to get to where you need to be.
For example, say you make $60,000 a year. If you save 10%, or $500 a month, for the next 30 years, with an average 9% return, you’d have around $900,000 to work with come retirement. If you saved 15% and made the same return for the same time period, you’d end up with around $1.34 million. That’s a big difference!
So make a plan to bump up your savings. You don’t have to go from saving 5% of your income to 15% instantly. You can set up automatic increases of 1% every 6 months until you get there.