By Duane Stevens. Originally published at ValueWalk.
When it comes to financial decisions, not all mistakes are created equal. Although you probably look for red flags when selecting individual investments, you may not give as much attention to other pitfalls that can put your whole financial future in jeopardy. Following are five of the big mistakes investors make – and how to avoid them.
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Avoid These Investment Mistakes
Sell Low, Buy High
Most investors are good at being consumers: we have an idea in our minds about the value of a product, we compare that with the price and may even wait for a sale before we make a purchase. But with investing, that logical process goes a bit haywire. When the market goes down, rather than seeing it as an opportunity to buy low, people panic and do the opposite. Then they get back in when the market is again on an upswing. That’s why the average investor consistently earns returns below an S&P Index fund.
While there are perfectly legitimate reasons to sell an investment – the fundamentals have deteriorated, for example, or it’s time to rebalance your portfolio – a market decline is not one of them. If your portfolio consists of a diversified mix of solid investments that match your risk tolerance and time horizon, you should stick with it through the ups and downs.
Choose Long-Term Investments For Short-Term Needs
People sometimes invest all their assets in stocks, including those that they’ll need in the near term. Then they may be forced to sell something before they had planned and at a lower value than they had hoped.
While equities have shown to be the best asset class for long-term growth, the stock market entails considerable risk of volatility from day to day. Better to allocate ample assets to cash or cash-like securities to address any upcoming needs for liquidity.
Save But Don’t Plan
Driven by fear running out of money, some very wealthy people just save and save for the future. Without defined goals or a clear understanding of what it will take to reach them, they don’t feel comfortable using some of their wealth to achieve greater happiness in the present.
Better to take the time to get a detailed accounting of your finances, including how it may change over time. Consider all the different possible scenarios – of interest rates, market returns and inflation, including best and worst cases. That way, you can confidently allocate your wealth for your best life today as well as tomorrow.
Ignore Unpleasant Possibilities
Many people have not thought through what they would do in the event of illness, grave injury or death of a loved one or themselves. As a result, they get caught off-guard by events that they knew – or should have known – were a possibility.
While it’s not fun to ponder these scenarios, it’s important to understand and acknowledge the range of risks you face and have a plan to address them. For example, consider how you would replace lost income or fund additional care needs, whether through insurance, additional savings, or a means to borrow.
Get Enthralled By The Investment Game
Some investors get so caught up in the horse race of investment returns that they gauge success by whether they beat an index or their neighbor’s performance.
What really matters is whether you’ll be able to achieve your financial goals. That’s why you should start with what’s truly important to you – whether that means retiring when and how you want, funding your child’s education, leaving your desired legacy – and create a plan based on your values.
About the Author
Duane Stevens, CFP®, CLU®, ChFC®, CLTC, CFS, BFA™, Vice President, Wealth Management, specializes in working with small- to medium-sized businesses and individuals in the medical community.
Alera Group Wealth Services
Three Parkway North, Suite 500
Deerfield, IL 60015-2567
Ph: 847-457-3100
Alera Group Wealth Services is a brand name utilized by Alera Group, Inc and certain subsidiaries and affiliates (collectively “Alera”).
Advisory Services offered through Alera Investment Advisors, LLC. Securities offered through Triad Advisors, LLC, Member FINRA/SIPC. Triad Advisors LLC is separately owned and other entities and/or marketing names, products or services referenced here are independent of Triad Advisors.
Information provided by Alera should not be considered tax or legal advice. Should you require tax or legal information, please consult your tax advisor or attorney.
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