Investing is not easy. Particularly, investing in the stock market is not easy. When one invests, you are acknowledging that you need to plan for the future, and because of that you might have to sacrifice some present needs or desires. You are also acknowledging that you have some goals for yourself and/or your family, and that you need to invest to be able to pursue those goals. Since investing can equate to a future benefit it takes courage, discipline, and a desire to invest; or more correctly stated, to invest wisely takes courage, discipline and desire. While a good portion of people have a desire to invest, when people do invest, they tend to make some common mistakes that hinder their ability to pursue their goals. This might seem surprising given that these days there is a plethora of information and tools available to would-be investors that should make investors more successful. There is nothing in regards to investing that most people can’t find on Google, or any other search engine, in books, on a blog, podcast, etc. that can help them become a better investor. However, even with all this information available to them, investors who go it alone (without a financial advisor) can end up ultimately making some common, simple mistakes that can have negative impacts on their ability to pursue their goals and have negative impacts to their portfolio. In my opinion, and from my experience, there are three common, and simple, mistakes that most investors make causing negative impacts to their financial situation These three mistakes individual investors make, in my opinion, are chasing “huge” returns, trying to time the market, and, not maximizing their savings rate. I will go into each of these in a little more detail and explain how to avoid these costly mistakes.
MISTAKE # 1: CHASING HUGE RETURNS
This is a common mistake I see among engineers, pilots, and medical professionals. Honestly, this is quite common for many different investors. I meet several investors that are wanting to invest but only for “massive” returns. A lot of times these investors do not have a particular rate of return they are seeking but they want something “better” than conventional investments such as stocks, bonds, and real estate. What is important to remember is that as an investor you need to decide what return is appropriate for you to pursue whatever it is you are trying to pursue, while mitigating risk as best as possible. You need to ask yourself, “Are market returns sufficient for what I need/want to do?”. There is no need to chase “huge” returns for the sake of chasing “huge” returns. This generally leads to investment in more speculative, or alternative, investments that expose you to unnecessary risk and getting you sidetracked from your goals. Instead, work with a financial planner that will help you determine what rate of return is appropriate for the level of risk you want/need to take to pursue your goals and then build a portfolio that can address those needs.
MISTAKE #2: TIMING THE MARKET
This mistake is far too common, and it can take on a few different forms. First, hanging on to too much cash because you are waiting for the right time for the market to pull back, or decline, before you invest your cash is a form of timing the market. The problem with this thinking is when is the timing right? What % decline does one wait for? 5%, 10%, 15%? Sure, if you notice the market is down 10% over the few trading sessions and you have some extra cash, put it to work in the market. But what I see happen is that people wait for the market to keep going down. They’re looking for the market to go down 20% or 30% and if it never does, then you are still holding on to cash waiting for the market to “go back down”. This leads to many investors holding on to too much cash for long periods of time, leading to missing out on market returns. Instead, as an investor you need to simply get in the market, regardless of time, and put your cash to work.
Second, investors try and sell when the market is at the top, or before a market decline, to lock in gains and avoid losses. The major problem with this thinking is that you must be right not once, but twice. You need to be correct when you sell, and that when you are selling the market is at the top before a major decline. And then you also need to be correct when you get back in the market again, and that when you get back in the market it is the “bottom” of the market before it recovers. It is nearly impossible to do this effectively and accurately with any consistency. The way to avoid this mistake is to simply be in the market and stay in the market. And, if the market does decline then take advantage and put some money to work in the markets.
MISTAKE #3: NOT MAXIMIZING YOUR SAVINGS RATE
This mistake is largely forgotten, ignored or misunderstood, and quite frankly can be a little boring to talk about but it is so important. One’s savings rate is essential to acquiring wealth, investing and having successful planning outcomes. There are many well know ways to save such as employer retirement plans and IRAs. I see common mistakes here. For example, one might not be maxing out their retirement plan contributions, not contributing enough to a retirement plan to take advantage of the employer match or not contributing at all to their retirement plan. Your retirement plan and IRAs are an essential part, and, a large part of your savings rate. It is important to take full advantage of your retirement plan and IRA options. Moreover, once you have taken full advantage of your retirement plan and can no longer contribute to it, you should not get complacent and stop saving. Investors forget that they can still save and invest in a taxable account with no contribution limits unlike a retirement plan or IRA that do have contribution limits. This is important to remember because saving and investing in a taxable account can have a positive impact on successfully pursuing one’s investment goals and objectives to help keep you on track to live the life you want.
To avoid this mistake work with your financial planner to make sure you are maximizing your savings rate by taking full advantage of your company retirement plan, IRAs and taxable accounts.
Conclusion:
So, there you have it, 3 of the most common mistakes investors make and how to avoid them. Now that you are equipped with this simple, yet powerful, knowledge the next step is to take action and to invest in yourself, your family and your goals and objectives. You can accomplish what is important to you and to help hold you accountable to the things that are important to you, work with a financial planner that you trust and that will help you avoid these 3 mistakes.
The opinions voice in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing includes risk including the possible loss of principal. No strategy assures success or protects against loss