The Biggest Mistakes Investors Make (Part 1 of a Series)

by financialmom on August 30, 2011

in Diversification, Investing, Money

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In order to win the Monopoly game, you have to have a strategy.  You need to have a plan, and stick to it, to be successful at Monopoly.  Today I am starting a series on The Biggest Mistakes Investors Make, because I see investors making these mistakes over and over again, which feeds into the fear during volatile markets.

In volatile markets, we are very tempted to make investing mistakes.  We somehow forget everything we have learned, and our desire to “do something” takes over.  Giving in to our short-term temptations can be very damaging to our long-term financial goals.

Here’s a reminder of some of the Biggest Mistakes Investors Make:

1)   Not having a financial plan.  You don’t know what you are invested in, why you invested in it, and what your goal is with this investment.  Or maybe you knew once, and now you are not sure.  If you don’t know the answers to these questions, it’s very easy to question your investment choices, and make poor decisions about changing them.

2)   Waiting too long to invest.  This leads to all kinds of problems.  If you think you have no money to invest now, you will not have money to invest later either.  We need to make our savings a priority, and pay ourselves first, after we give our tithe.  The longer you wait, the more risk you will need to take to get to your financial goals.

3)   Not taking advantage of “free money.”   If your employer offers a match on your company plan investment, and you are not investing at least the amount to get the full match, you are making a big mistake.  Think of it as a bonus for being a good saver.  Tell your children this, so they don’t make this mistake while they are young!

4)   Listening to the media for investment advice.  If you buy in to the media, especially during volatile markets, you will sabotage your long-term goals.  All the doom and gloom of the media is designed to get readers and viewers.  You know this, so ignore it.

5)   Market timing.  Market timing is jumping in and out of the market, to try to decrease your losses, and increase your returns.  Markets are random!  No one knows where the markets are going tomorrow!  Many of us have made the mistake of taking our money out, and putting it into cash in volatile markets.  All this does is lock in your losses, and stop you from participating in any future market gains. 

6)   No diversification.  I see this way too much – in fact, over 90% of the time when I look at portfolios.  Investors are putting all their eggs in one basket.  And it’s usually the Large Cap Growth basket, only one asset class.  This happens because investors are more comfortable investing in company names they know, and want to invest in the United States.  We do live in a global economy however, and you are taking way more risk than you need to by owning only one asset class.

7)   Stock picking.  This is believing some investment money manager guru, or your financial advisor, knows which stocks to pick for best future performance.  No one knows the best stocks to pick for the future.  I don’t care what crazy technical analysis they are using.  No one knows.

8)   Track record investing.  Goes right along with stock picking – choosing investments based on their past performance.  “Past performance is not an indication of future returns,” is stated in the very fine print of every investment prospectus.  This gets countless investors into trouble, because they choose investments based on what was hot in the recent past.

9)   Not understanding the risk/return relationship.  Investors want big returns, but don’t want to take any risk.  It doesn’t work that way.  Define your financial goals, find out what it will take to get there, and understand there will be a certain amount of risk involved in reaching your goals.  Know what your risk number is, so you don’t have to be fearful in volatile markets.  Ask your financial advisor, and if they don’t know what your risk number is, it’s time to get another advisor.

There are many more big mistakes investors make, but these are some of the biggest mistakes I see (and have experienced myself).  Ignore the temptation to “do something” during volatile markets, which may do serious long-term damage to your financial goals.

New Profile Pic 2599R The Biggest Mistakes Investors Make (Part 1 of a Series)Pamela Otten is CEO of Pamela Otten LLC, a Registered Investment Advisor. She loves to work with women business owners and entrepreneurs, and women in transition due to job change, death, or divorce. Pamela will help you set and reach your financial goals, educate you to understand your investments, and teach you how to do more charitable giving. Pamela is a Qualified Kingdom Advisor (www.kingdomadvisors.org), trained and committed to integrating biblical principles with her investment advice.

cc smallest The Biggest Mistakes Investors Make (Part 1 of a Series)Photo Credit – EvelynGiggles

Financial Planning, Investment Advice, and Investment Management provided through Pamela Otten LLC, Registered Investment Advisor.

The opinions voiced in this material are for general information only, and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, please consult your financial advisor prior to investing.

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