When learning how to invest, it is important to learn from the best, but it also pays to learn from the worst. These top 5 most common mistakes have been compiled to help investors know what to watch out for. If any of these mistakes sound familiar, it is likely time to meet with a financial adviser.
- Trading too much and too often – When investing, patience is a virtue. Often it takes time to gain the ultimate benefits of an investment and asset allocation strategy. Continued modification of investment tactics and portfolio composition can not only reduce returns through greater transaction fees, it can also result in taking unanticipated and uncompensated risks. You should always be sure you are on track. Use the impulse to reconfigure your investment portfolio as a prompt to learn more about the assets you hold instead of as a push to trade.
- Paying too much in fees and commissions – Investing in a high-cost fund or paying too much in advisory fees is a common mistake because even a small increase in fees can have a significant effect on wealth over the long term. Before opening an account, be aware of the potential cost of every investment decision. Look for funds that have fees that make sense and make sure you are receiving value for the advisory fees you are paying.
- Focusing too much on taxes – Although making investment decisions on the basis of potential tax consequences is a bit like the tail wagging the dog, it is still a common investor mistake. You should be smart about taxes — tax loss harvesting can improve your returns significantly — but it is important that the impetus to buy or sell a security is driven by its merits, not its tax consequences.
- Not reviewing investments regularly – If you are invested in a diversified portfolio, there is an excellent chance that some things will go up while others go down. At the end of a quarter or a year, the portfolio you built with careful planning will start to look quite different. Don’t get too far off track! Check in regularly (at a minimum once a year) to make sure that your investments still make sense for your situation and (importantly) that your portfolio doesn’t need rebalancing.
- Taking too much, too little, or the wrong risk – Investing involves taking some level of risk in exchange for potential reward. Taking too much risk can lead to large variations in investment performance that may be outside your comfort zone. Taking too little risk can result in returns too low to achieve your financial goals. Make sure that you know your financial and emotional ability to take risks and recognize the investment risks you are taking.