Marc A. Hebert's Money Sense: Investment mistakes are common - how to avoid themBy MARC A. HEBERT
September 29. 2017 7:02PM
Mistakes happen - and in the area of investing some are common and repeated often. You can increase your chances of investment success if you are aware of the typical errors and try to avoid them. Here are a few:
Investment decisions based on emotions and not on facts. It is a common mistake to think that since everyone else is buying a stock, then it must be a good investment. It's called the herd mentality. This is where a good personal investment plan can help you avoid the temptation to follow the crowd. A related mistake is buying "hot" investments with no sound basis for your decisions. This could include buying based on the hot tips from your friend. After all, if his stock suggestions are as good as his abs workout tips, you can't go wrong.
Choosing investments that are not suited to your goals or investment time horizon. Saving for retirement that begins 20 years down the road involves different investment choices than saving for a home purchase in the next five.
Failing to diversify and putting all of your eggs in one basket. This includes those who put all their bets on one high-flying stock. One example would be Amazon. If you had made an investment in this stock years ago, you would probably be wealthy today. But what if it wasn't Amazon? If it was Enron, then you would have ended up with nothing.
Reacting to short-term events and not to long-term trends. This can equate to selling when the market is down and buying when the market is up. Watching the market drop is nerve racking, but by selling, investors tend to lock in losses and preclude gains from future recoveries. Buying when the market is high could achieve increases for one year, only to watch your investments decline the very next.
Trying to time the market. We all hear "buy low and sell high." This is hard to do on a consistent basis. The temptation is to react to market volatility. Responding to the market's daily ups and downs is a surefire way to lock in losses. Even professional traders have a poor track record of guessing the market's moves.
Speaking of market volatility, staying on the sidelines until the market calms down might not be your best strategy either. Markets almost never "calm down." You might miss some downward activity, but you will miss the upside as well.
Relying on pundits for advice. The airwaves are crowded with experts making recommendations. One person says buy, the other sell. Consider the advice and then come to your own conclusions based on your own research into the investment.
Allowing fees, expenses, and/or commissions to become the major factors in making investment decisions. These things are important, but they are only a small part of the overall investment evaluation.
Allowing fear or greed to drive your investment decisions. Perhaps the price for one of your stocks keeps going higher and higher. You are set to make a small fortune, the price just needs to get to "x" dollars and then you will sell. Guess what, the price might drop drastically wiping out any profits you might have made if you weren't hanging on for the last dollar. Sometimes taking profits off the table - at least for a portion of the investment - isn't such a bad idea.
Buy and forget. The tendency is inertia. A well-structured portfolio should align with your investing goals. Rebalancing - returning your portfolio to the target asset allocations - will force you to sell the asset class that is performing well and buy more of the worst performing asset class. Doing so periodically will help you reap long-term rewards.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at firstname.lastname@example.org. Your question and his response might appear in a future column.