Eager investors want make smart investing decisions and knowing how to put one’s money to work is an important part of proactively growing wealth. You can learn how to utilize an investing checklist and how to act on important economic indicators. Becoming a better investor can also be tied to recognizing and reacting to a potential investment mistake.
SEVEN INVESTING MISTAKES TO RECOGNIZE
Investors are not perfect as it’s impossible to anticipate every market move. It is possible, however, to avoid common investing mistakes. Here are seven investing missteps to avoid on your investment journey.
1. Letting Fear Extinguish Your Interest In Investing
Investing can be intimidating particularly in the initial stages. With endless opportunities, risks of losing money, and countless strategies there are many aspects to consider when deciding where to put your money. Hesitations and fears are normal feelings, especially in the beginning stages. Be careful not to let your emotions cloud your investing judgment. For example, married couples may let one of the spouses handle financial decisions because they feel uncomfortable with money matters.1 Choosing to be uninvolved with investing may be harmful to one’s marriage and overall ability to become financially independent. Financial literacy can help overcome investing fears, inspiring confidence through knowledge, which is a great way to clear your head of fear when it comes to investing.
2. Contributing Too Little, Too Late To Your 401(k)
Employers may offer automatic enrollment in their 401(k) plans to help encourage higher employee participation. While studies have shown this increases the number of enrolled workers by about 10%, the average default contribution amount is still quite low at 3.4%.2 Automatic enrollment in a 401(k) plan alone isn’t enough, you should consider taking advantage of the benefits a 401(k) can offer to help save for your retirement needs. Take full advantage of your employer match and consider increasing your contributions each year until you can reach the maximum contribution, which is $18,000 for 2015.3 It’s amazing how much wealth you can accumulate by diligently saving over the years. Further reading: What % Of Your Salary Should You Save For Retirement?
3. Trying To Be A Perfect Investor
When it comes to investing, the thought of making mistakes can be daunting, however investing perfecting is nearly impossible. Remember, all investors make mistakes, including the best and brightest. You cannot predict where the markets will move each day so it’s important to stay away from trying to time your trades perfectly. Feeling stress and hesitating on your trades can be more hurtful than helpful. It’s important to educate yourself and find a comfortable asset allocation to put your money to work.
4. Chasing Hot Trends / Selling During Panic Situations
Every investor has heard that you should try to buy low and sell high. Following those guidelines is not as easy as it may seem. Looking at the chart below shows one example of investors attempting to chase market performance. When stocks in equity mutual funds are perform well, there is a temptation to buy more shares and take money out when the when the markets are performing poorly. That’s contrary to the old adage. Instead, focus on a long-term approach that will be more favorable to your investment performance that letting your emotions trigger active trading.
5. Paying Too Much In Fees
What may seem like negligible fee amounts now may end up costing you a fortune later. It is estimated the average American household spends $155,000 in investment expenses5 during their lifetime. While you may be focusing on performance, keep an eye out for the fine print and the fees and expenses that can whittle away at your hard-earned returns. Pay attention to fees an investment advisor may charge or a fund may impose on shareholders and consider those costs as a direct hit against overall performance.
6. Hoarding Cash
Although you may not have cash in your mattress, hoarding substantial cash in the bank may not be paying the types of returns you would hope for in the current low interest rate environment. Many people still feel too intimidated to invest their money if they were burned, or are still recovering from the last recession. While holding cash can have a place in many investors’ portfolios, like other types of investments, too much concentration in one area may be detrimental to your overall portfolio. State Street did a recent study that showed amongst 2,800 surveyed investors, the average cash allocation was a high 36% during one of the longest bull market runs in history.6 Keep abreast of your overall portfolio and look for opportunities that your risk tolerance will allow, which may mean a portion in cash as well as other investment vehicles.
7. Not Taking Risks
Taking risks can leave an uncomfortable feeling, but playing it too safe when it comes to investing can cost you growth opportunities. Studies have shown that over 56% of investors between the ages of 25-35 do not believe they need to invest in the stock market to reach their investment goals.7 This can lead to outliving one’s savings and not being able to outpace rising inflation. It’s important to understand your tolerance for risk and invest accordingly. But if fear is your guiding motivation, perhaps gaining further financial education can be just what you need to help you better understand the risk/reward paradigm and help give you the confidence to make smart investment decisions.
Anyone can become a smarter investor; knowledge and experience can go a long way. Knowing what you should avoid is just as important as knowing what to invest in. To save yourself from throwing money away, you’ve learned to avoid these seven investing mistakes:
• Letting unfamiliarity with the markets prevent you from investing
• Under-contributing to your 401(k) plan
• Obsessing about being a perfect investor
• Paying too much in fees over your lifetime
• Hoarding too much cash
• Understanding your risk tolerance
Take action to achieving your financial targets today. Open an account with Motif Investing and see what is available for you.
1Yahoo Finance, http://finance.yahoo.com/news/5-common-costly-investing-mistakes-040000438.html
2Yahoo Finance, http://finance.yahoo.com/news/5-common-costly-investing-mistakes-040000438.html
6Money CNN, http://money.cnn.com/2015/02/10/investing/big-investing-mistakes/