10 Common Investing Mistakes
- Author Eric Hutchinson
- Published December 28, 2009
- Word count 733
Experience has shown that there are a number of commonly made mistakes that can seriously impair the success of an investment portfolio. Successful investing is rooted in investment principles that have been proven over time in a wide range of economic and market environments.
Here are just a few examples of investment basics that should not be ignored.
Failing to Define Objectives
The first step in developing a successful investment program is to clearly articulate specific goals. Is the purpose of this investment to build wealth over time, preserve capital and generate current income, fund an education program or reduce tax obligations? Do you need to manage financial risks through an insurance program that combines protection with investment flexibility or do you need to plan for retirement? Defining your goal will provide the focus that will help you determine the appropriate time horizon, risk parameters and investment allocation.
Not Sticking to the Investment Plan
The first step is making a plan. The second step is following it. A "good" investment is only good for you if it helps you meet your stated objectives. For example, if you and your spouse are nearing retirement, you probably should not buy a small cap security favored by your unmarried 35 year old son. Every potential investment should be evaluated on the basis of how well it fits the time and risk criteria you have established.
Indiscriminately Buying Investments
Never buy an investment just because someone wants to sell you one. Make sure that each investment is compatible with your investment objective and risk tolerance. If the person trying to sell the investment cannot or will not answer your questions to your satisfaction, think very hard about doing business with that person.
Failing to Adjust to Changing Market Conditions
While long-term investing tends to smooth out the short-term cyclical market fluctuations, markets and economies can also experience long-term changes that must be addressed. Staying informed and knowing when to take appropriate action can often be as important to long-term success as patience and discipline.
Using Yesterday’s Investments in Today’s Markets
The structure and dynamics of the economic, market and tax environment has grown increasingly complex over the years. As a result, new investment vehicles and options have evolved to meet changing needs and challenges. Now, more than ever, it is critical that you recognize and take advantage of the broad range of investments and services available to you.
Taking Profits Too Soon
Investing is a long-term process. Buying an investment and then selling it for a short-term profit is trading, not investing, and can be a risky course of action. Early profit-taking not only impacts your ability to meet long-term goals, it can also have serious tax implications. Determining the best time to take profits requires in-depth knowledge of not only the economy and markets, but also of your overall financial and tax circumstances.
Keeping Declining Investments
There is a difference between riding out cyclical market fluctuations and holding on to a security that is unlikely to rally. The savvy investor knows when to hang on and when to sell off a portfolio holding. Many investors, however, are reluctant to make a sell decision. Some simply do not want to admit a mistake, while others believe that the loss is not "real" until the investment is sold.
Failing to Keep Abreast of Tax Laws
Taxes considerations are an important part of every investment portfolio. For example, capital gains taxes can quickly erode realized gains, while a loss can be a plus to an investor who needs additional deductions. In an environment where tax laws change frequently, it is essential that you continually review the tax implications of your investment strategies.
Ignoring the Time Value of Money
Many investors fail to recognize the true worth of certain investments—especially those in which interest or dividends earned are compounded over time. The earning potential of these long-term investments is far greater than the annual return, especially if interest is allowed to accrue on a tax-free or tax-deferred basis.
Having Unrealistic Expectations
Too many investors expect to "get rich quick" and demand dramatic and immediate returns from their investments. These people are usually disappointed when their expectations are not realized and tend to continually turn over their portfolio looking for "hot" investments that will provide instant gratification. This is a very risky approach that seldom leads to financial security.
Eric Hutchinson, CFP®, CLU is President of Hutchinson Financial, an independent Registered Investment Advisory firm based in Little Rock, Arkansas. Founded in 1988, the firm specializes in retirement planning and is one of the area’s leading independent financial planning and investment management firms.
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