The concept of saving for a rainy day has probably been around as long as there have been humans. Something deep inside us wants to prepare for an uncertain future by setting something aside — whether it’s extra food, a trunk full of gold or an emergency fund.
But saving smartly is harder than it sounds. Ideally, we want our savings to work hard for us. So, we try to invest wisely in the right mix of assets. But we often fall down on that task.
Here are some of the costliest mistakes investors make — and tips for avoiding them.
1. Not investing
The biggest mistake would-be investors and savers make is not investing at all.
Don’t wait for that raise, inheritance or lottery win. Start today, right now, with whatever amount you can.
If you can’t find $5 a day, start tracking your expenses to see where you can cut costs. We partner with a budgeting app called YNAB (short for “You Need A Budget”).
2. Being impatient
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 and I still have it. Had I been listening to CNBC or some other media outlet promoting trading, I almost certainly wouldn’t still own it.”
In other words, don’t act rashly.
3. Investing before doing your homework
I’ve made the mistake of going on gut instinct and 20 minutes of internet research when investing in risk-based assets like stocks.
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.
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 books at the library. There’s no reason to be uninformed.
4. Not diversifying
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 businesses, including firms of different sizes and companies in different sectors.
One easy way to get this type of diversification is to own mutual funds. A mutual fund allows you to own a slice of hundreds of companies.
5. Taking too much risk
Everybody wants to double their money overnight. But if you’re always swinging for the fences, you’re going to strike out often.
Some investments are little more than gambling — such as stock options and commodities futures. These types of investments can work out for some experts, or those who are exceedingly lucky. But if they’re all you’re going to invest in, you’re really just gambling.
6. Not taking enough risk
On the other side of the coin, some investors stand like deer in headlights, unwilling to take even a measured amount of risk. Instead, they keep savings in insured bank accounts, earning peanuts in return.
Putting all of your money in insured accounts will guarantee that you never lose anything. But it will almost surely mean the purchasing power of your savings won’t keep pace with inflation. In other words, you’ll become poorer over time.
7. Getting greedy
The first time I made money on a stock, I was hooked. I went from a stable, thoughtful investor to a wild speculator overnight.
Thankfully, my father stepped in and convinced me to stop sprinting and start walking again. If he hadn’t, I probably would have blown my entire savings.
8. Paying too much attention
There is such a thing as information overload. With the internet, newspapers, magazines and cable TV, it’s easy to get more than your fill of conflicting information.
Step back, look at the big picture and find a few financial journalists or others you trust. Then, tune out the rest.
9. Following the herd
Billionaire investor Warren Buffett has said, “Be fearful when others are greedy; be greedy when others are fearful.”
Many of the stocks Stacy owns were purchased when the Dow Jones Industrial Average was below 7,000 and nobody was buying — an example of being greedy when others are fearful.
His logic is as follows:
“If you’re convinced the economy is going to zero, buy guns and canned goods. But if you can reasonably expect a recovery someday, invest — even if that day is a long way away, and even if it’s possible things could get worse before they get better.”
10. Holding on when you should be letting go
Stocks are best played as a long-term game. You should hold on to stocks long enough to see a good return. However, if you don’t know when to get out, it can cost you big. Companies can go bankrupt, for example.
So, while you shouldn’t obsess over your investments, you shouldn’t ignore them either.
11. Being overconfident
The economy runs in cycles of boom and bust. When times are good, people often confuse luck with skill.
Such misunderstanding arguably played a role in what happened during the housing bubble and the dot-com bubble that preceded it. Being in the right place at the right time isn’t the same as being smart.
12. Failing to adjust
How you invest should change as your life changes. When you’re young, it makes sense to invest aggressively, because you have time to recoup from mistakes. As you approach retirement age, you should reduce risk.
The Great Recession wiped out the savings of many people who were on the verge of retirement. That shouldn’t have happened, because they shouldn’t have had that much exposure to stocks so close to retirement. Check out “Build a Successful Retirement Plan With These 5 Steps” for tips on avoiding such a fate.
13. Not seeking qualified help
Investing isn’t rocket science. But if you don’t have the time or temperament, consider getting help.
The wrong help? That would be commissioned salespeople more interested in their financial success than yours. The right help? A fee-based planner with the right blend of education, credentials and experience. Stop by our Solutions Center and check out “How to Find Your Perfect Financial Adviser” to learn more.