Unless you’re an accountant or financial guru, the average person is bound to make a mistake here or there when it comes to investing. While some mistakes won’t do much damage, most of these seemingly innocent mishaps can be costly. And that’s a problem when you’re trying to reach goals and get better with your money.
To prevent any catastrophe from happening, here are nine common mistakes that you’re making and how you can fix them.
1. Being ‘Predictably Irrational’
Paul Philip, president of Don Mills, a Financial Wealth Builders Inc., tells The Guardian that the most common mistake he sees investors making is being ‘predictably irrational.’
“We are emotional beings and are affected continually by the news around us. Most investors react exactly the opposite to what they should do when their investments inevitably fluctuate. They sell when the prices of their shares drop. They are frustrated and upset, then eventually they get their confidence back and buy when the market has already recovered.
“To such people, fear and greed are their overriding decision-makers. Dumping and buying shares as the prices fall and rise are not good for long-term well-being. Too many people live their investing lives like hamsters on a wheel, running faster and faster and getting nowhere.
“Successful investing is about controlling what you can. You can’t control what the market does, but you can control what you do in response.”
Philip concludes, “In my experience, a person’s returns depend less on whether they pick great investments than on whether they can manage their emotions.”
2. Not Saving Enough
A Google Consumer Survey for personal finance website GOBankingRates.com found that 62% of Americans have less than $1,000 in savings. “It’s worrisome that such a large percentage of Americans have so little set aside in a savings account,” said Cameron Huddleston, a personal finance expert and columnist for GOBankingRates. “It suggests that they likely don’t have cash reserves to cover an emergency and will have to rely on credit, friends, and family, or even their retirement accounts to cover unexpected expenses.”
One way to resolve this problem is to automate your savings - which is another mistake if you’re not already doing.
All you have to do is to decide where you want to put your money. This can be a savings account, money market, 401(k), or IRA that has money automatically placed into the account by withdrawing a percentage of your paycheck. This helps you meet savings goals and ensures that you’re putting enough aside.
3. Not Preparing For Retirement
People aren’t just forgetting to put aside money for an emergency. They’re also not setting enough aside for retirement. This is a common problem for Millennials. However, planning for your retirement is more than just saving money or placing it in a 401(k). As noted in U.S. News, “While saving is an important component, retirement plans need to cover things such as insurance, disability coverage, college education for kids and tax implications.”
When preparing for your retirement, it’s important that you start saving as early as possible and considering things like creating a diversified portfolio and having a tax plan for investments and assets. Also, don’t forget to review your finances yearly, stick to your budget, and improve your financial education.
4. Being too Conservative
“It may seem safe to leave your money in cash or a stable value fund that won’t lose money,” writes Erik Carter in Forbes. “However, there are two kinds of risks that you’re actually taking.”
The first risk is “that your money won’t grow enough to keep pace with inflation. If you earn 2% a year and inflation runs 3% a year, you’re actually losing 1% a year in real terms. Your account balance may look bigger but you won’t be able to buy as much with it.”
The second risk is that you won’t have enough money saved for retirement.
While there is always a risk involved with the stock market, you have to be a little risky if you want to grow your wealth. If you’re still not convinced, just remember, the market always goes up.
5. Being Too Aggressive
While being too conservative with your investments is definitely a mistake, so is being too aggressive. Even though the market is doing really well, don’t get greedy.
As Carter writes, “When times are good and the stock market is earning double digits, it’s tempting to want to be more aggressive.” He adds, “On the other hand, when the stock market eventually declines, it can be even more tempting to sell out and stop the bleeding.”
Keep in mind that investments go in cycles, so don’t rely strictly on past performances or try to time the market. Re-evaluate your investments and if you aren’t comfortable with losing half of what you have invested, then you may be too aggressive.
6. Chasing Trends
Patrick McKeough, Toronto-based publisher of The Successful Investor, The Wall Street Forecaster and the TSInetwork.ca, says that another common mistake is falling for the hype around certain investments. “Our basic rule is to downplay or avoid stocks in the broker/media spotlight unless it’s a really good idea,” he cautions.
Always remember that the market is unpredictable in the short run. If you want to play the game wisely, plan to make investments in the long-run - not just to get rich quick.
7. Not Picking-Up Free Money
Believe it or not, there’s free e-cash money all around you. Whether it’s tax deductions, unclaimed assets. grants, or credit card rewards, there are multiple locations to find this free money. It would be foolish not to at least do a little digging!
However, the biggest location where you can pickup free money is by matching what your employer put into your 401(k).
8. Putting All Your Eggs in One Basket
For those unfamiliar with diversification, it’s best described as a “technique that reduces risk by allocating investments among various financial instruments, industries and other categories.” Diversification is recommended by investment professionals since it “is the most important component of reaching long-range financial goals while minimizing risk.”
You should also “diversify among different asset classes” like stocks and bonds to “reduce your portfolio's sensitivity to market swings.”
9. Not Being Aware of Hidden Costs
Finally, be aware of all the hidden costs involved with investing. You may not realize it at first, but it’s common to get hit with additional taxes, management fees, and trading fees. Often times these costs are automatically withdrawn from your account or charged after they’re incurred. In other words, you’ll rarely see a bill for these costs and they can quickly add-up.