I believe that a good financial plan is a defensive one. One of the ways you can mount a good defense is by avoiding mistakes. With that in mind, here are twelve common investing gaffes you’d do well to avoid:
Number 12: Buying on a cold call. When people call you out of the blue to sell you something, of course you should be skeptical. To me, the offer has presented itself much like that Nigerian “prince” who needs to get his gold out of the country. You know better.
Number 11: Believing that one guarantee covers everything. When somebody says a financial product is guaranteed, find out exactly what is guaranteed. Is your principal guaranteed? The time length of the investment? The interest rate? Make sure you understand what your guarantee covers.
Number 10: Doing nothing. I’ve met people who sold all of their investments in 2008 and have been in cash ever since. They’re scared to go back in, but doing nothing can be a huge mistake because if you aren’t investing your money in some capacity, how can it grow?
Number 9: Buying investments because of the tax benefits. Don’t buy a financial product simply because it saves you money on your taxes. Rather, the primary consideration for buying something is the underlying economic benefit. If it has tax benefits, too, that’s gravy in my opinion.
Number 8: Making a purchase- or sale-decision based on a past price. Some investors get stuck on certain prices they’ve seen in the past, and won’t buy or sell until that particular price is reached. That so-called “framing” is not a good idea. Investors need to take action based on the investment’s future regardless of what its price was in the past.
Number 7: Buying an investment because it’s exciting. Don’t buy the hot stock just because it’s hot. It’s easy to get sucked into the excitement surrounding the market’s newest darling—right now it’s Bitcoin—but take a step back. Remember when so many people over-invested in technology stocks? Be careful.
Number 6: Owning too many items. I often see people with a bunch of different investments. It can be difficult to keep track of them, but the bigger problems I see with that is…
Number 5: Not being diversified. People often think that a lot of investments equal diversification. Not so. A diversified portfolio includes several different types of stocks from different markets, and some bonds, too. You can read an article about diversification here.
Number 4: Failing to sell at a loss. Sometimes it’s not smart to wait to get back to even before selling. You can’t look backward (see Mistake Number 8, above). If an investment is down and it looks like it will keep going down, you should probably sell it.
Number 3: Selling winners too soon. Again, don’t make emotional decisions. If you’re nervous that a stock’s reign will end, don’t rush out and sell. Try your best to make sure your decision to sell is justified.
Number 2: Buying yesterday’s favorites. Nostalgia can be nice, but it has no place in investing.
Number 1: Thinking you can time the market. No one can time the market and no one should try. And by the way, our investing strategy at Money Matters is not market timing. Instead, we have an objective mathematical formula that gives us a signal when the market is going down in a dangerous fashion, and tells us when it looks safe to buy back into the market, too.