Investing is at best a risky proposition and sometimes even the best investment ideas don’t work out. However avoiding these 9 mistakes can help improve your investing outcomes:
Inability to take a loss and move on
It’s difficult for many investors to sell an investment with a loss. Often they prefer to wait until the investment at least gets back to a break-even level. I think its part of our competitive nature. Investing is not a competitive sport, leave that for our Olympians. When reviewing your holdings ask yourself: “Would I make this investment today?” If the answer is no, it’s time to sell and invest the proceeds elsewhere.
Not selling winners
I’ve had many clients over the years that refuse to sell highly appreciated holdings all or in part. There is always the risk that you’ll sell and the price will keep going up. But sometimes it’s best to protect your gains and sell while you’re ahead or at least consider selling a portion of the holding and reinvesting the proceeds elsewhere. The latter is part of the rebalancing process. Same question as above applies here.
Investing without a plan
When you take a road trip in your car you generally have a map to help you to get to your destination. Investing is a means to an end, a way to achieve our goals such as providing a college education for our children or funding our retirement. Without a financial plan how will you know how much you need to accumulate to achieve your goals? How much risk to take? The types of returns you need to shoot for? If you are on track toward your goals? Essentially investing without a plan is much like hopping in the car without any idea where you are headed.
Trying to time the market
It’s difficult to predict when the market will rise and fall. Even if the stock market is following a general trend, there will be up and down trading days. Trying to buy and sell based on those daily fluctuations is difficult. While there are professional traders who do this for a living, for most of us this is a losing proposition.
Worrying too much about taxes
Taxes can consume a significant portion of your investment gains for holdings in a taxable account. While nobody wants to pay more tax than needed, in my opinion paying taxes on a gain is almost always better than dealing with an investment loss.
Not paying attention to your investments
Your portfolio needs to be evaluated and monitored on a periodic basis. You should reevaluate an investment when the company changes management, when the company is acquired by or merges with another company, when a strong competitor enters the market, or when several top executives sell large blocks of stock. This applies to mutual funds as well. Manager changes, a dramatic increase or decrease in assets under management, or a deviation from its stated style should all be red flags that cause you to evaluate whether it may be time to sell the fund.
Failure to rebalance your holdings
This goes hand and hand with having a financial plan. Ideally you have an investment policy for your portfolio that defines the percentage allocations of your investments by type and style (stocks, bonds, cash, large stocks, international stocks, etc.). A typical investment policy will set a target percentage with upper and lower percentage ranges for each style. It is important that you look at your overall portfolio in terms of these percentages at least annually. Different investment styles will perform differently at various times. This can cause your portfolio to be out of balance. The idea behind rebalancing is to control risk. If stocks rally and your percentage allocation has grown to 75% vs. your target of 60% your portfolio is now taking more risk than you had planned. Should stocks reverse course, you may be exposed to oversized losses.
Assuming recent events will continue into the future
The last 12 years have been tough on investors. The market tumbled during the 2000-2002 time frame and then again in 2008-2009. These events have instilled fear into many investors. It’s hard to blame them. However this fear and the assumption that recent events will continue into the future might also be keeping you from investing in the fashion needed to achieve your financial goals. Taking the events of recent years into account is healthy; however letting these events paralyze you can be destructive to your financial future.
Building a collection of investments instead of a well-crafted portfolio
Are you investing with a plan or do you simply own a collection of investments? Great teams like my beloved Green Bay Packers have a better chance of winning when everyone embraces and executes their role in the game plan for that week. In my experience you will increase your chances for investment success when all of the holdings in your portfolio fulfill their role as well.
Nothing guarantees investment success. Avoiding these 9 investing mistakes as well and others can help you increase your chances of success.
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Photo credit: Lending Memo