3 Important Investment Mistakes To Avoid

By David S. Chang

Investing the past decade has been a roller-coaster with its highs and lows. Interestingly, the volatile market changes aren’t the biggest reasons for a shrinking investment portfolio, our individual actions are. Warren Buffett, the Oracle of Omaha and perhaps the greatest investor to ever live, states that investors should not beat themselves up.

“The nice thing about investing in stocks is that, over time, equities are going to do well. American business is going to do well. America is going to do well. So you have the tide with you.” Buffett further states “Don’t beat yourself. Beating yourself is half the problem.” Buffett believes that one of the best ways to build wealth is through investing in stocks even though the road can be very bumpy at times.  However we can be our worst enemy at times when it comes to investing. A football team in order to increase its chances of winning needs to not only have a good offense and defense, it also needs to avoid making costly mistakes such as fumbling, throwing interceptions, or being penalized at the wrong time.

In other words, having a great investment plan won’t matter as much if you keep making avoidable mistakes and beat yourself up. There is a reason there is a term known as “Smart Money” for professionals that make money and most amateurs do not. Here are the three biggest mistakes investors make.

  1. Trying to time the market. Nobody can time the market consistently. If they could, there would be people who have never lost money in the short-term, which after being involved in the stock market since 1994 and studied the markets before then, has never happened. It is a big mistake to think that people can, especially people who don’t do it full time. It is important to understand that there is always someone else on the other side of a trade. So if one person wins in the short-term, another person technically loses. For example, if you sell at a profit and sell, if the stock goes, you win the buyer loses. But if the stock continues to rise, you lost the gain you could have had and the buyer wins in getting it. Professionals on Wall Street who do this for living have much better chances of winning. So for amateurs to think they can time the market and beat professionals and others consistently are making a big mistake.
  2. Not paying attention to fees and costs. I had a potential client come to me and after doing their research on their portfolio, realized they were paying 4.5% in fees every year in addition to the 5% commission their broker was getting! This means the commission brings down their portfolio 5% right off the bat, then they need to bring in 4.5% more than their target goal per year! So if you need a 7% annual return to meet your financial goals, your portfolio needs to perform at 11.5% or more per year. If the market is even for an extended period of time, high fees will reduce your portfolio. There is nothing wrong with paying someone to help you manage your finances, especially if you have no desire, time or knowledge to do so. But pay attention to your fees and make sure your broker or adviser has your best interests at heart. Do not be afraid of hurting their feelings if you need to move your money elsewhere. Remember this is your money, nest egg, and hard earned cash. Only you can make the best decision for it. You may not have time to pick and manage your investments, so find someone that does and costs are reasonable.
  3. Taking investment advice from friends, families, and hearsay without doing the proper due diligence. I make it a high priority that our clients have a disciplined approach to investing. Out of the numerous tips that some of my clients got, none of them came out to be true and was in fact a significant loser. There is no problem with getting advice, but it is important to not follow it blindly. If they proceed to give it, feel free to thank them, listen to them if you wish, and respond that you will see how it fits with your current investment plan. Being disciplined is key since human nature is to buy high and sell low. Also by the time an investment tip rolls around, chances are the investment is already at its top and the bubble is about to burst!

Studies show that a long-term strategy that Warren Buffett believes everyone should follow is one of the best ways to build wealth. It is important to now stand in the way of your own success, and the top three mistakes can keep you from growing your portfolio! You don’t become one of the riches people in the world by making these mistakes.

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