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1. Not being diversified enough.
Diversification means “not putting all your eggs in the same basket.” This is a risky world, and it’s not a good idea to be making bets on a handful of individual stocks - unless you are a gambler. The last few years have seen precipitous drops in many “blue chip” stocks. Proper diversification across many industries and hundreds of stocks can minimize the damage you suffer when one stock or industry has a particularly sharp decline.
2. Not having an investment plan.
If you don’t know where you are going, you probably won’t get there. An investment plan should set out your goals, both long term and short term. It should include an assessment of your current assets (and debts), how much you expect to be able to save, and how you feel about investment risk. It should identify an appropriate mix of stocks, bonds, and cash for your goals and temperament, and be designed to get you through risky times.
3. Paying too much in investment costs.It’s a minefield of costs out there. Many people feel forced to make an unpleasant choice: if they want someone to help them, they have to accept the high cost world of the big financial companies, with their hefty commissions and imbedded fees. As a result, you can end up buying mutual funds with high expense ratios, 1% or more in 12b-1 fees (that you have to read the prospectus to find), and perhaps redemption fees when you buy or sell. Commissions on buying and selling bonds, stocks, and anything else can be exorbitant, too. All these costs come out of your investment returns, so they should be low, and they should pay for value that is added to you.
4. Not understanding what you’re investing in.If you don’t understand how it works and why it will help you achieve your goals, chances are it has risks and costs that you don’t know about. Just because a sales representative recommends it to you, or you know someone else who has bought it, doesn’t mean it is good for you.
5. Chasing manager performance.
This is one of the most tempting traps people fall into. The reason it is so seductive is that it sounds so logical: managers with good “track records” must have more insight or talent than others - right? Wrong. Most often, recent good returns are the result of the part of the market they invest in (such as small cap value when that style is in favor), or luck, and won’t be repeated in the future. As Robert Stovall, the retired head of research at S&P said on ABC’s 20/20, "It's just not true that you can't beat the market. Every year about one-third of the fund managers do it…Of course, each year it is a different group." There is a lot of evidence on this one.
6. Buying stocks based on a stockbroker’s recommendation.
Do we really need examples of this one? Stockbrokers, however well meaning, really don’t know any more than they read in those reports, and if you buy and sell on a commission basis they have a glaring conflict of interest. Is this how you want to invest your hard earned money?
7. Getting caught up in euphoria or panic.
It is human nature to place more weight on the events of the recent past than on long term averages. If the stock market (or oil, gold, emerging markets, etc.) have been going up at a steep pace recently, we tend to think the trend will continue. Maybe it will, but our human nature makes us want to put more money into it the more it goes up. We get swept away with the euphoric “this time it’s different” arguments which too often justify buying too late in a trend - just when everybody is happiest and it is ready for a fall. Similarly, when markets have been going down for a while, we get scared that the downtrend we observe will carry on forever. The further they go down, the more worried we get, and the more tempting it is to say “just get me out - I can’t take it any more”. Neither approach is right. Better to have a good investment plan that says what you will do at very high or low levels in the markets.
8. Saving too little.You can’t count on the government to take care of you unless you want the kind of life that the government will provide. As a very rough estimate, you will be able to take out about 4% of your portfolio annually when you retire if you are invested in both stocks and bonds and you want your investments to last 25 – 30 years or so. That means that to generate $40,000 in income, you’ll need to have at least $1,000,000 invested. How much will you need when you retire? We can help you decide.
9. Being too aggressive or too conservative when you invest.
It’s important to keep in mind why you are investing. You are trying to reach some goals - buy a second home, send your kids to college, or retire a little early. If you take too much risk, you might lose too much during bad times, and then the goals will be much harder to achieve. Alternatively, putting everything in CDs might reassure you that you won’t lose principal, but the low returns may not be able to build wealth or keep up with inflation. This is an example of being falsely conservative - avoiding market risk, but not putting your money to work for you. A balanced plan combining elements of both is right for most people. We can help you find a good mix for you.
10. When you retire, gifting too much of your assets to your children or grandchildren. This happens more often than you would think: A person has worked all of her life. When she retires, she has a 401(k) account to roll over into an IRA. It seems like a lot of money that she has control over for the first time. Her daughter is struggling to pay the bills, or maybe wants to build an addition onto her house. The new retiree decides to give her daughter a chunk of money “so I can see her enjoy it while I’m alive”. Problem is, that gift reduces the principal in the IRA that has to generate income over the next 30 years, and it can’t be replaced. Gifting of retirement assets sounds generous and loving, but it may mean having to move in with your children later in life.
We welcome your inquiry, and promise not to pressure you if you ask for more information. Choosing an investment advisor is a big decision. We respect your right to explore what would be best for you. Contact Us >>
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