Investing’s Seven Sins
Kiplinger put together a list of the seven biggest missteps investors make. These mistakes can hurt returns and compound the damage of downward market moves if not corrected.
- Following the Herd: Chasing after performance by investing in the stocks, funds or asset classes with the best current price performance can be a recipe for disaster. Popularity can lead to unjustifiably high prices and big losses. A better strategy is to have preset rules governing what you will and won’t buy.
- Giving Into Fear: Though day-to-day price volatility is front and center, it is not the biggest risk facing investors; rather, inflation is. Not maintaining a constant allocation to stocks, regardless of what the market is doing, can lead to a long-term decline in your ability to buy goods and services.
- Hanging on too Long: Investments change over time, and not selling can cause you to give up gains or see losses widen. A disciplined sell strategy based on pre-established rules can help you fight the psychological urge to hold onto what you already own.
- Neglecting to Rebalance: Rebalancing is the process of adjusting your portfolio back to your targeted allocations. If a portfolio is not periodically rebalanced, its allocations can become out of whack.
- Making Things Complicated: The growing number of investment options can make it seem like it is easier to become diversified. The reality, as Kiplinger cautions, is that you may end up more perplexed than protected. A better strategy is to stick to securities and funds you understand and simply focus on maintaining a basic long-term asset allocation strategy.
- Paying too Much in Fees: Every dollar you pay in expenses is a dollar you will never see again. Opting for funds with lower fees and using an online discount broker instead of a full-service broker can make a big long-term difference in your wealth.
- Failing to Stick to a Plan: Kiplinger says the greatest investment sin is failing to formulate a plan. A written plan governing your portfolio allocation, your buy rules and your sell rules not only gives instructions for how to manage your portfolio, it can also take the emotional component out of your investing decisions.
Source: “The 7 Deadly Sins of Investing,” Kathy Kristof, Kiplinger’s Personal Finance, November 2013.