I take my emergency fund very seriously. Having cash on hand is the only true safety net that will help me get out of any financial jam, including investing mistakes. Access to credit is a lifeline too, but it doesn’t squash the problem, it only kicks it down the road. So, before I even consider investing any money, I make sure my family is protected for up to 6 months, incase my business slows down, we get into an accident or even if the roof springs a leak.
The savings account today is not sexy. It’s quite boring, currently paying .75% (www.captialone360.com) But the peace of mind it provides me is priceless.
Above and beyond my emergency fund, I chose to invest my money in the stock market and real estate. Historically, they have provided attractive returns (above my saving account). I also understand the volatility that comes with it.
The money I put to work, is not money that I need to pay mortgage or my sons daycare bill.
My investment (long term wealth building) accounts can withstand the short term downturn in the market only if I don’t need access to that cash to pay any regular bills.
This is the 2nd layer of peace of mind an emergency fund provides.
With all that being said, we can now talk investing.
Investing is taking money you have today and putting it to work with the hope that it will increase in value over time. Instead of purchasing some material object or going out to eat, by investing, you are choosing to delay gratification with the chance of receiving more money in return in the future.
At best it is a risky proposition and sometimes even the best investment ideas don’t work out.
While I can’t predict the future, I do know that if you can avoid these 8 mistakes you should be able to improve your investing results.
Read them, understand them, memorize them and avoid them!
1) Inability to take a loss and move on
If you are holding on to an investment that is a “loser” sell it and walk away. It might never make it back to your purchase price. NEVER.
2) Not letting your winners run
You don’t have to sell your investments as soon as they turn a small profit just to lock in some gains. It is in your best interest to let your winners continue to climb. It’s ok to set some sell parameters so all your profits don’t get wiped out but let them go as long as you can.
3) Investing without a plan
Standard conversation:
Me: Mr. and Mrs. Client why are you investing this money?
Them: Because we want more of it.
Me: How much do you want?
Them: As much as possible.
This is the worst reason to invest. How do you know when you have enough? How do you know when to stop taking RISK? Investing is a means to an end, a road map to achieve your goals such as providing a college education for your children or funding your retirement.
Without a financial plan, how will you know how much you need to accumulate to achieve your goals? How much risk should you take? What types of returns do you need to shoot for? Are on track toward your goals? Essentially investing without a plan is much like hopping in the car without any idea where you are headed.
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4) Trying to time the market
Your brain is not built to buy low and sell high.
It’s actually wired to do the EXACT opposite.
When things are flying high, you want to jump on board and enjoy the fun.
When things are at their worst, it is natural to want to run away and hide.
Stop thinking you will able to overcome millions of years of evolution. You can’t.
Because of that–trying to buy and sell based on those daily fluctuations is not possible.
You are almost guaranteed to get in to late and get out to early. You do this enough times, poof all your money will be gone.
5) Not paying attention to your investments
Many times I show up to a potential clients’ home and see unopened envelopes on their kitchen table. Once I sit down and take out my pad, they immediately push all of the envelopes toward me.
Now, if I was new to my profession, I would totally be confused. I mean, I don’t want their mail!
But, because I have many years experience and this isn’t my first rodeo I know exactly what’s going on. These envelopes are filled with their investment account statements. I’m talking e-trade, 401k, IRA.. you name it. Normally, they would toss these into the trash unopened, but because I was coming over, they had the decency to save some.
Your portfolio needs to be evaluated and monitored on a periodic basis. The companies you have invested in can go through major changes—think GM, Ford, Lehman Brothers, etc..(credit crisis 2007), the funds could have diverted from their stated objectives or most importantly your goals might have changed!
I am not telling you to track everyday, but quarterly OPEN THE ENVELOPES and take a look!
6) Failure to rebalance your holdings
Diversifying you portfolio (buying a variety of investments) correctly, means that at times, when some things are going up in value, others might be going down! That is ok and expected. We do not want all things to move together! However, if 1 or 2 investments move dramatically up or down this will cause your portfolio to be out of balance. It can even make your portfolio move risk levels. (2001—tech stocks made up most peoples’ portfolios—conservative or aggressive)
The idea behind rebalancing is to control risk.
If stocks rally and your equity allocation has grown to 75% vs. your target of 60% your portfolio is now taking more risk than you had planned. Should stocks reverse course, you could be exposed to over-sized losses.
Have a plan to bring things back in line!
7) Assuming recent events will continue into the future
The first 15 plus years of this century have been tough on investors. The market tumbled during the 2000-2002 time frame and then again in 2008-2009. More recently the stock market dropped steeply and suddenly in the wake of the Brexit vote in the U.K. These events might have instilled fear into you. If you are younger person, maybe this has been your entire financial life. I understand your pain. I entered this profession in 2003. So this timeline, is all I know as well.
However this fear and the assumption that recent events will continue into the future might also be keeping you from investing correctly. You could be investing too conservatively to accomplish your long term goals. Taking the events of recent years into account is healthy; however letting these events paralyze you can be destructive to your financial future. This holds true for stock market drops as well as protracted bull markets.You must step out of your comfort zone a bit to allow the markets to work for you.
8) Building a collection of investments instead of a well-crafted portfolio
My wife loves fashion. She keeps up to date on the latest trends, styles and even the seasonal colors.
Your investment portfolio should not look like my wife’s closet. It should not be filled with the hottest stock of the moment. Instead it should be comprised of neutral colors that will survive any fashion period. These pieces never go out of style and that is how you will have success in the markets.
Investing Mistakes Recap:
Avoiding these 8 mistakes will be hard. Very hard. Maybe you have even already committed a few them already. All of this is ok. We need to stop looking to the past and focus only on the future. By avoiding these mistakes going forward you will increase your odds of being a successful investor!
As always, you can consult with me to discuss your currently portfolio. Look for future posts on the best ways to save for retirement and check out my recent post on rebalancing or rebooting your portfolio
Thanks for stopping by and I hope you achieve financial success!
