When learning how to invest, it is important to learn from the best, but it also pays to learn from the worst. These top 5 most common mistakes have been compiled to help investors know what to watch out for. If any of these mistakes sound familiar, it is likely time to meet with a financial adviser.
1. Not knowing the true performance of your investments - It is shocking how many people have no idea how their investments have performed. Even if they know the headline result or how a couple of their stocks have done, they rarely know how they have performed in the context of their portfolio. Even that is not enough; you have to relate the performance of your overall portfolio to your plan to see if you are on track after accounting for costs and inflation. Don’t neglect this! How else will you know how you are doing?
2. Reacting to the media - There are plenty of 24-hour news channels that make money by showing “tradable” information. It would be foolish to try to keep up. The key is to parse valuable information out of all the noise. Successful and seasoned investors gather information from several independent sources and conduct their own proprietary research and analysis. Using the news as a sole source of investment analysis is a common investor mistake because by the time the information has become public, it has already been factored into market pricing.
3. Chasing yield - A high-yielding asset is a very seductive thing. Why wouldn’t you try to maximize the amount of money you get back? Simple: Past returns are no indication of future performance and the highest yields carry the highest risks! Focus on the whole picture; don’t get distracted while disregarding risk management.
4. Trying to be a market timing genius - Market timing is possible, but very, very, very hard. For people who are not well trained, trying to make a well-timed call can be their undoing. An investor that was out of the market during the top 10 trading days for the S&P 500 Index from 1993 to 2013 would have achieved a 5.4% annualized return instead of 9.2% by staying invested. This difference suggests that investors are better off contributing consistently to their investment portfolio rather than trying to trade in and out in an attempt to time the market.
5. Not doing due diligence - There are many databases in which you can check whether the people managing your money have the training, experience, and ethical standing to merit your trust. Why wouldn’t you check them? Ask for references and check their work on the investments that they recommend. The worst case is that you trade an afternoon of effort for sleeping better at night. The best case is that you avoid the next “Madoff” scheme. Any investor should be willing to take that trade.