The concept of saving for a rainy day has probably been around for as long as humans have. It’s virtually instinctive to prepare for an uncertain future by setting something aside — whether it’s extra food, a trunk of gold ingots or an emergency fund.
But just saving is often not enough to cover a long-term crisis — and it’s certainly not enough to cover the ever-rising cost of living comfortably in retirement. Putting your money in a savings account is more secure but only marginally more profitable than stashing your money under the mattress.
Ideally, we want to make our savings work as hard for us as we do for it — through investing in the right mix of assets, hopefully without losing anything in the process. But we often fall down on that task. Here are some of the most costly mistakes investors make:
1. Not investing
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The biggest mistake would-be investors and savers make is not investing.
Don’t wait for that raise, inheritance or lottery win. Start today, right now, with whatever you can. Consider this: If you can save $150 a month — that’s only about $5 a day — for 30 years and earn 10 percent on it, you’ll end up with $343,391. That’s enough to change your life and the lives of those you love.
If you can’t find $5, start tracking your expenses to see where you can cut. We partner with PowerWallet, a free service that lets you set goals and automatically tells you where your money’s going. If you’re not using it or something similar, start.
2. Investing before doing your homework
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When it comes to investing in risk-based assets like stocks, one mistake I’ve made is going on gut instinct and 20 minutes of internet research.
In college I decided to start investing as a way to build my retirement. Good plan. But I invested in companies I knew and liked, rather than actually understanding them. Bad plan.
When dealing with investments that can go south, don’t invest without a clue. If you’re thinking about stocks, there’s plenty of research and other information available online for free, not to mention in library books. There’s no reason to be uninformed.
3. Being impatient
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In “The 10 Commandments of Wealth and Happiness,” Money Talks News founder Stacy Johnson offers this advice: Live like you’re going to die tomorrow, but invest like you’re going to live forever. He also offers an example of how patience pays:
The biggest winner in my IRA is Apple. I believe I bought it in 2002 or 2003 — my split-adjusted price is around $1 per share. Lately, Apple has been trading at $140 to $150 per share. Had I been listening to CNBC or some other outlet promoting constant trading, I almost certainly wouldn’t still own it.
In other words, don’t act rashly.
4. Not diversifying
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Investing in stocks involves what’s known as market risk: If the entire market tanks, your stocks probably will as well. It also involves company risk, the risk that a specific company will do poorly.
It’s hard to eliminate market risk, but you can reduce company risk by investing in lots of companies, including companies of different sizes and companies in different sectors.
Can’t afford to own many companies’ stocks? That’s what mutual funds are for. A mutual fund allows you to own a slice of dozens — even hundreds — of companies.
5. Taking too much risk
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Everybody wants to double their money overnight. But if you’re always swinging for the fence, you’re going to strike out often.
Some investments are little more than gambling — like stock options and commodities futures — as Stacy Johnson details in “Ask Stacy: Should I Invest in Stock Options?”
There’s nothing wrong with these types of investments if you’re an expert or exceedingly lucky. But if they are all you’re going to invest in, you’re really just gambling. Go to Vegas; at least you’ll get free drinks.
6. Not taking enough risk
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On the other side of the same coin, some investors stand like deer in headlights, unwilling to take even a measured amount of risk. Instead, they keep their savings in insured bank accounts, earning less than 1 percent.
Putting all your money in insured accounts will ensure you never lose anything. But it will also ensure that the purchasing power of your savings won’t keep pace with inflation. In other words, you’ll become poorer over time.