Yahoo Finance Avoid These 8 Rookie Investing Mistakes
Invest for the long haul.
If you're like most investors, you'd probably rather spend your free time with family, friends, watching football, shopping or taking the kids to the park. The financial markets are complex, and there is a lot of information that can be confusing to someone who's simply trying to save for retirement, sock money away for their kid's college education and build a nest egg. Here are eight rookie investing traps to avoid while you map out your investment plan.
Don't let emotions rule your portfolio.
A common mistake do-it-yourself investors make is switching investments to cash at the wrong time and letting fear or greed rule their decisions. "This is a marathon, and you invest over multiple market cycles, not letting market dips scare you into selling at the wrong time. Create a written plan with your goals and objectives as well as your portfolio allocation. Refer back to this document if you find yourself wanting to exit the markets," says Todd Douds, director of operations at Pittsburgh-based Fort Pitt Capital Group.
Don't chase performance.
Markets move in cycles, and investors who look back at last year's big winners and jump on board might be buying near or at a top. Don't follow a fad and buy into a hot stock without doing solid research on the fundamentals. "If an asset class or security has already had large gains, that was yesterday's good idea. Don't follow the crowd because you will just be chasing performance, which is a loser's game," Douds says.
Don't trade too much.
For many long-term investors, the best strategy may be to hone in on a proper asset allocation between stocks and bonds, pick funds and hunker down for the long term. Eager beavers who switch in and out of funds too often will find commissions eating away at their nest egg. "Trading has costs to it, and the more you trade, the most cost you incur in your portfolio. Buy assets at a reasonable price and hold onto them," Douds says.
Don't forget about the fees.
Exchange-traded funds have revolutionized the cost of investing in a variety of asset classes. Rookie investors may ignore expense ratios, but over time, high fees can eat into a portfolio's overall return. Many funds are available to investors today with a 0.20 percent expense ratio ($20 annually per $10,000 invested) or less. While costs are only one factor to consider when choosing a fund, they are an important consideration.
Don't try to time the market.
Individual investors and sometimes even professionals fall into the trap of trying to time the market, or in simple terms, selling high and buying low. "It has been shown time and again that trying to outsmart the collective wisdom of the millions of smart, well-informed people who trade in the market is very hard to do consistently, no matter who you are. Disciplined rebalancing keeps you away from that market-timing trap," says Derek C. Hamilton, certified financial planner at Elser Financial Planning in Indianapolis.
Don't put all your eggs in one basket.
Proper diversification is the foundation of successful long-term investing. Spreading investments across different asset classes and into those that move in the opposite direction of stocks helps reduce risk in a portfolio. "Many investors think of diversification as simply owning more stocks, but do not realize you must also consider asset allocation as well as how your investments move in relation to one another, which is known as correlation," says T. Michelle Jones, vice president at Bryn Mawr Trust in Bryn Mawr, Pennsylvania.
Demand full transparency from your advisor.
If you use a financial advisor, it is important to understand how he or she gets paid. Some are paid from the financial products they sell, while others are "fee-based," which means they collect these payments to some extent and charge clients a fee. Then there are "fee-only" advisors, who are paid only by their clients without any product-based payments. "How much you pay is important, but so is the source. Is your advisor paid to provide objective advice to prudently manage your wealth or to sell you financial products?" Hamilton says.
Be patient and learn.
If you're looking to build a nest egg for retirement or your kid's college account, plan to have time on your side. Don't monitor your portfolio every day. Review your statements quarterly at most, says Danielle L. Schultz, certified financial planner at Haven Financial Solutions in Evanston, Illinois. "Beginners are often surprised to see how much the market can vary day by day and jump in and out, usually at just the wrong times. I recommend people learn about how to really analyze companies," she says.
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